A more compassionate capitalism

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DAVIS SMITH: When we launched the business and we had this 24-hour adventure race, we actually needed to make backpacks for everyone doing the race, and we needed to make it as quickly as possible. The only way for us to do it was to use remnants, leftovers.

JEFF BERMAN: The clock was ticking for Davis Smith and his small team at Cotopaxi. So the new outdoor gear company got to work sewing bags out of salvaged fabric. They mixed bold colors. The wackier the combinations, the better. And in that moment, the signature look for the Cotopaxi brand was born.

SMITH: And then we really doubled down on it. And it was like, “Hey, what if we started making one-of-a-kind backpacks?” So, a huge amount of our product that we sell is one-of-a-kind. Every single bag is unique. You could start seeing the personality of the sewers in the different products. It was really a cool thing to see. Whatever they got, no matter how funky it was, they loved it. The return rate was zero.

BERMAN: Just over a decade later, Cotopaxi has cemented a stellar reputation among outdoor enthusiasts and intrepid travelers with its gear and apparel.

This week, we hear from founder Davis Smith about the spark of inspiration that started it all, how he leveraged lessons from past struggles to build the Cotopaxi team, and why he stepped away from the CEO role in the midst of the company’s meteoric rise.

[THEME MUSIC]

I’m Jeff Berman, your host.

Davis Smith subscribes to a philosophy that’s simple enough to put it on a T-shirt — and he does: Do Good.

For Davis, that means a social justice mission is at the core of the company. Cotopaxi is a B-Corp and donates 1 percent of its revenue to non-profits that fight poverty.

This “conscious capitalism” model is driven by Davis’ faith-fueled passion for helping others. That faith is also why he’s taking a break from business. Davis is currently serving his Church in Brazil, and that’s where he joined us from for this conversation. We recorded this over video. Candidly, I often struggle with our video interviews because it’s harder to create a personal connection. As I think you’ll experience, that wasn’t the case here. Davis is heart-led, self-aware, candid, and a heck of a storyteller.

Davis, welcome to Masters of Scale.

SMITH: Thanks, Jeff. This is so fun. I’ve been looking forward to this.

Copy LinkLessons from an early blitzscaling failure in Brazil

BERMAN: Before we got into the Cotopaxi success story, I wanted to hear about the lessons Davis learned the hard way, back when he moved to Brazil the first time — as a recent MBA graduate — and tried to make a go of it in e-commerce.

SMITH: I’d met along the way on my journey, Marc Lore, who had founded a business called diapers.com, and I watched him scale that business pretty significantly before Amazon bought it. I had this interest in Brazil, and I knew Marc, so I thought, “Hey, what about a baby business down in Brazil?” The internet’s relatively nascent, not a ton of e-commerce businesses down in Brazil. I had a couple of kids, so I knew the pains of buying things for kids. Like a lot of entrepreneurs, it’s naiveté. You have no idea the challenges you’re going to face. Going to Brazil had all sorts of challenges. I’d never lived in Brazil, didn’t speak Portuguese.

Brazil’s very, very bureaucratic, very complicated to do business in. There were some challenges that we didn’t anticipate. The story was good until it wasn’t good.

BERMAN: What scale did you reach with the baby business, and what ended up going wrong?

SMITH: Over the next two or three years, we grew to maybe 20 million in revenue. The business scaled; it grew.

What we missed was there’s a focus that needs to happen on efficiency before you hit the gas. You need to make sure the business is actually making money. In that business, we didn’t do that. We validated that there was a business and there was a need, but we actually didn’t build the efficiency that we needed to be profitable as we scaled. So as rapidly as we scaled, we accelerated losses, which meant we had to go raise more money. That’s a painful process to be in.

BERMAN: Yeah, I mean, there are myriad stories of companies where, I mean, this is Reid Hoffman and blitzscaling — pour gas on the fire and grow, grow, grow. But what I hear you saying is that because you hadn’t built the foundation exactly right, when you’re one degree off at the bottom, you can be 20 degrees off at the top very quickly. Is that the right way to think about the challenges you faced?

SMITH: Absolutely.

BERMAN: And you had a co-founder in the baby business.

SMITH: Yes, my cousin.

BERMAN: And things went sideways between the two of you.

SMITH: Yeah. Unfortunately, that relationship was really impacted as we worked together over 10 years. Honestly, it’s one of the saddest things in my life — just that lost relationship.

BERMAN: I don’t want to dwell on such a sad experience for you, but I’m curious if there are lessons from the falling out there that are useful for our audience or that you’ve applied as you’ve gone forward in your own journey.

SMITH: Yeah, I think one of the lessons I learned was when you’re starting a business, it’s so fun sometimes to have a best friend or a family member that you can brainstorm with. But I think another approach may be starting to say, “Hey, instead of choosing my co-founder based on who I love and who’s close to me right now, why don’t I go find a great idea first? Once I have the right idea, then I should go find a co-founder that really helps me solve the problem. The best person is probably not going to be my brother, cousin, or spouse.”

Copy LinkThe origins of Cotopaxi

BERMAN: Sorry that happened, and I’m glad you also were able to learn the lessons and apply them going forward. So let’s talk about Cotopaxi. Where did the idea come from?

SMITH: So I’m living in Brazil and having this experience building that business that was painful, especially this relationship that was unraveling. My entire life, I’d wanted to find a way to help people.

When I was 19, 20, 21 years old, I was a missionary for my church in Bolivia for the Church of Jesus Christ of Latter-day Saints. Those two years were transformational for me. Living in Brazil, it was just in my face, seeing the poverty there every day. Feeling so discouraged, at 34, I wondered why I hadn’t figured out how to use my life to help people. I went to bed and then started having ideas come to me. I wrote them down, then went out on the couch and spent the next hours, the entire night, and the following days where the entire idea for Cotopaxi came to me — colorful backpacks, using the business to do good. Everything.

BERMAN: Did it feel at the time like an epiphany? Did it feel like divine intervention? How did it feel?

SMITH: I’ve never experienced anything like it before. I don’t know that I ever will again. I knew exactly what was happening. I wrote it all down. I have pages of journal entries from those 36 hours. For me, it was divine. I don’t know how else to describe it, but I realized I needed all those experiences to go do what I needed to do next. No one wanted to believe the world needed another outdoor brand. Every investor I talked to was like, “Don’t we already have Patagonia?”

But I had no doubt. I knew it would work. I knew it needed to exist. Luckily, we had a few great investors that believed in us. Kirsten Green from Forerunner Ventures was the very first, and she stepped up in a big way. It made a big difference.

BERMAN: And she’s one of the very, very best on every level. Not only a great investor but a great human. You got a lot of these questions. “The world doesn’t need another outdoor brand.” Why? Did you have a love for the outdoors?

Had you grown up in the outdoors? Was it a personal passion? Was that part of the origin here?

SMITH: Absolutely. I love the outdoors. My dad is an adventurer, and we camped and backpacked often. In the countries we lived in, we’d make our own raft, float the Amazon River, and fish for piranha. We’d survive on little uninhabited islands, make spears, spearfish, and eat coconuts to survive. I loved adventure, the outdoors, travel.

I merged this love for the outdoors with a desire to do good and blended these two things together.

BERMAN: I want to understand what happens at the end of the 36 hours, but first, two questions. One, the name — how did it come to you? And two, the llama?

SMITH: The name came from my childhood. When I lived in Ecuador, I went to a school called Academia Cotopaxi. It was an American international school named after the Cotopaxi volcano outside Quito, Ecuador — a beautiful snow-capped volcano. I went camping and backpacking there with my dad and brother. My dad was our scoutmaster, and our international troop had so many cool adventures. I loved that mountain and that school experience. When I started thinking of names, it was the first one that popped into my head. It connected to my life experience and the outdoors, so it felt perfect.

BERMAN: And then the llama?

SMITH: The first place I saw llamas in the wild was at the base of Cotopaxi. We were camping. In 2015, we just moved to Ecuador from Puerto Rico, where I’d spent other years as a child. It was magical. We woke up, making breakfast on the campfire, and llamas walked through the campsite. As an 11-year-old, it was magical — just one of those moments you never forget. They’re mysterious, rugged, always in a herd, never alone. So I thought, “What a great mascot for a brand about unity and making the world better.” I love the llama.

BERMAN: Still ahead, how Davis scaled Cotopaxi — and its global impact on extreme poverty.

[AD BREAK]

Welcome back to Masters of Scale. You can find this conversation and more on our YouTube channel.

Copy LinkInside Cotopaxi’s unique launch

This is a new category for you. It’s a crowded category. How did you figure out your founding team and find the money? Did you get the funding?

SMITH: Yeah. So, I started looking online for the founding team. I was going to do it differently this time. I went onto LinkedIn and started looking for experts in the outdoor industry. Award-winning designers of products. I reached out to a few on LinkedIn, and they responded.

We had a call on Skype, back when Skype was the thing. Somehow they believed in this vision of building a brand that could make the world better, where we’d use our profits for poverty alleviation. We built a small team. I ended up resigning from my role at my business in Brazil, moved back to the U.S., and flew into Utah.

I decided to build it there — a great place for outdoor businesses. All five of us met in a mountain cabin, and I laid out the vision. It was a magical time for entrepreneurs — that early visionary stage where nothing’s been built, but the world is yours to do whatever you want. It was just magical. It took a few months, but we made our first product. We ended up launching the business in a unique way that blasted the business off in a way I never imagined.

BERMAN: And tell us about that?

SMITH: Yeah, so I love adventures. We bought a couple of llamas… online classifieds.

BERMAN: As one does.

SMITH: Yes, as one does. We went around college campuses in Salt Lake City with these llamas. We told everyone we were launching a new outdoor adventure brand.

And announced a 24-hour Amazing Race-style event, this huge scavenger hunt where teams got Cotopaxi backpacks. They had 24 hours to get as many points as possible from various adventures and community service.

They lived the brand for 24 hours. We had 30,000 social media posts in the first 24 hours. People were living the brand, wearing our product, sharing it on social media. The winning teams got trips and gear. Celebrating on stage with 5,000 people all wearing the product, waving do-good flags, was surreal. It felt divine.

Copy LinkHow Cotopaxi raised their initial fundraising round

BERMAN: That’s beautiful. So, how did you fund the business to get it started?

SMITH: Yeah, having experience raising venture capital made a difference for me. I went to Silicon Valley and met with a hundred investors. I have a list of every investor I met, now around 1,000 people.

I’ve been rejected a lot. My mission experience as a 19-year-old prepared me for an entrepreneur’s rejection.

BERMAN: For those who don’t know, Davis, as a missionary, you’re literally knocking on doors, having doors slammed in your face multiple times a day, right?

SMITH: Yes, and if you’re not resilient, it can really beat you down. But what keeps you going is a belief — a deep belief that what you have and are matters and is worth sharing. I felt the same with Cotopaxi. This matters, no matter how many people reject me.

We ended up with a handful of investors, like Kirsten Green from Forerunner Ventures and others. They invested before I’d sold a single backpack. It was really belief in me and the vision we had.

Andy Dunn from Bonobos and other founders also contributed. It was enough to get the business started. They believed in the vision.

Copy LinkCotopaxi’s mission to eradicate extreme poverty

BERMAN: We’ve talked about the company’s mission. Will you talk about the mission and how that fits with running it as a business?

SMITH: Our mission is to eradicate extreme poverty in my lifetime. In 1820, 94 percent of the world was in poverty. When I was born, it was about 40 percent. Now, it’s under 10%. So we are eradicating extreme poverty. I want to be part of the movement showing business can be a force for good. Capitalism can be done better. It’s an amazing tool that’s lifted many out of poverty. But it’s also a little broken — there are things that aren’t quite right.

We donate 1 percent of all revenues, which, to be clear, in many years was more than we made in profit. So it’s a big commitment. Our investors had to buy into it, but it’s core to us. It’s why we exist. We are not an outdoor brand; we’re a brand that does good. We show capitalism can be better, and we make great outdoor gear to do it.

BERMAN: And your set-up is a B Corp, right?

SMITH: Yeah, we’re a benefit corporation and a certified B Corp. I reached out to our attorney before starting the business. I asked about starting as a benefit corporation, and he advised against it, saying no venture-backed business had done it. Investors might not be interested.

But I felt strongly. If I wouldn’t do this for the right reason, it’s not right for me. We incorporated as a benefit corporation and became a certified B Corp a year later.

BERMAN: And how do you decide where the 1 percent of profits go?

SMITH: There was a learning curve. I oversaw our impact work because I was so passionate. I was involved in nonprofits globally, especially in Latin America. For example, an orphanage I visited often in Bolivia meant a lot to me. But a year in, I hired a chief impact officer who came from Salesforce.

She assessed how we were doing things and was critical of my unsystematic approach. We hired a chief impact officer before a chief marketing officer. Our board questioned spending on someone to help us give away money, but I insisted. We had to do impact right, and be best in class.

BERMAN: In the last 40 years, most companies optimize for shareholder value. But capitalism is flawed. How do you engage with other founders about conscious capitalism?

SMITH: The most powerful way is to be a visionary leader. I’ve been on stage talking about Cotopaxi, rarely discussing the product — just what we represent. It touches people. Humans are good and want to do good. They want to make the world better but aren’t always sure how. Our example helps them see possibilities.

Next-generation entrepreneurs will do better, learn from what we do, and I think the most powerful way to affect change is to be inspiring and visionary. I mentor entrepreneurs to do good. The right way should attract and retain talent, reducing costs. Our marketing costs are less due to word of mouth, and our materials are from repurposed scraps, reducing environmental impact. Doing things right benefits profitability.

Copy LinkStepping away from Cotopaxi

BERMAN: You stepped aside from Cotopaxi’s day-to-day leadership. Why, and what are you doing now?

SMITH: It was hard because I love Cotopaxi. It wasn’t just a job; it was a calling. My church asked if we, my family and I, would lead a mission in Brazil for three years, putting our life and business aside. It took us one second to say yes. Hard but aligned with our values. We moved, sold our house, and now live here.

My daughter repeated her senior year here in Brazil. It wasn’t easy, and I miss my work at Cotopaxi every day, but I love what I’m doing. It’s fulfilling.

BERMAN: What a way to scale — mentoring the next generation of leaders.

SMITH: Yes, when I accepted the call to go to Brazil and lead a mission, I had to replace myself as CEO. I initially told our team that we’re building something bigger than us. So, I wasn’t the right CEO forever. The replacement had to align with values and scale expectations. I shared it on social media, and found amazing candidates.

Replacing oneself isn’t easy, but staying connected is important. I’m on the board, communicate with team members, especially the CEO. It was a learning experience.

BERMAN: Davis, what happens after your mission? Do you go back to Cotopaxi? Do something new?

SMITH: I don’t know yet. I’m halfway through, with another year and a half to go. I suspect I’ll return to Cotopaxi, not as CEO but in a role still involved in impact and culture. I love culture and mentoring young people, scaling them as world-changing leaders. I’m excited for their potential.

BERMAN: Thank you, Davis. It’s a pleasure and honor to speak with you. Thank you for all you’re doing in the world. I’m grateful you’re leading by example and for the impact you’re having.

SMITH: Thank you. Thank you for inviting me and for telling people’s stories so beautifully.

BERMAN: It’s impossible to come away from a conversation with Davis Smith and not feel at least a little inspired.

He went from introducing his brand by wandering college campuses with llamas to making hundreds of millions in revenue all in the span of a decade.

His story is a tremendous example of what’s possible when you lead with creativity and compassion.

I’m Jeff Berman, thank you for listening.