Editor's Note: Inc. Magazine announced its pick for Company of the Year on Monday, November 23. It's Slack! See which one Inc. readers chose as their favorite company of 2015. Here, we spotlight Rent the Runway, one of the contenders for the title in 2015.

In November 2009, Rent the Runway began as little more than a passion project. The team of four, co-founders Jennifer Fleiss and Jennifer Hyman included, worked in a space carved out of an architecture firm, with no air conditioning, and one wall plastered pink. 

"To even call it a company was a stretch," says Hyman, RTR's CEO. "It was like a labor of love. This was pre-Airbnb, pre-Uber. It was very unusual that two young women were going to found a startup. We never even imagined that it was going to be a real business." 

Today, the fashion-rental juggernaut--which now occupies a "dreamy" space in New York City's stylish SoHo neighborhood--has more than five million members, 850 employees, and 350 design partners, and is on track to rent $1 billion worth of dresses alone (in retail value) by the end of this year. Further, RTR closed a $70 million Series D funding round in June, bringing its total capital raised to $126 million, from such investors as Highland Capital Partners and Technology Crossover Ventures. The company's valuation is reportedly between $400 million and $600 million. 

That's impressive--particularly when you look at the competitive field RTR runs with. Not only did the high-flying luxury flash-sales site Gilt Groupe put off its public offering indefinitely amid competitive pressures, but fellow fashion startup Nastygal recently made layoffs as well. And the LA-based subscription commerce company Beachmint nearly ran out of money before forming a joint venture with Conde Nast's Lucky magazine. If you go to the site today, however, you get a redirect to LuckyShops.com

But the pressure to perform is no less powerful. Certainly, on-demand clothing delivery and upkeep is an expensive ordeal, acknowledges Hyman. "There's nothing to brag about going out and raising a huge amount of capital. It's become glamorized," she says, conceding that "our model requires a ton of cash."

In the process of expanding, Hyman admits that she's had to make "tough decisions," including letting some of her staffers go--about 2 percent of the company, she estimates. At least two top executives left RTR in 2015, including CTO Camille Fournier and CFO John Rucker. Meanwhile, in August of this year, Hyman brought on Chris Halkyard, formerly a chief supply chain officer at Gilt Groupe, as the company's first-ever chief logistics officer, and Maureen Sullivan, previously the president of AOL, who serves as its first president. 

"We had to move from an executive team that managed function, to an executive team that oversaw business units," Hyman says. She adds that she's proud of the fact that 15 former RTR employees have since gone on to launch their own companies. 

Amid all of this commotion, RTR managed to introduce two game-changing business segments in 2015. The company continued opening brick-and-mortar stores, now located in New York, Chicago, Washington, D.C., and Las Vegas. It also launched a new business model: an unlimited subscription service for everyday wear. 

In the early days, the company had a simple, but ambitious goal: To make high fashion more accessible by renting out luxury dresses for a fraction of their retail cost. No longer would women be forced to suffer the humiliation of rewearing the same gowns on special occasions like weddings and New Year's Eve celebrations.

That was before Hyman recognized the potential of, as she calls it, "putting your closet on rotation." RTR is now poised to launch its new subscription service, which has been operating in beta and has "tens of thousands" of wait-listed users. Hyman projects it'll launch officially in 2016. For $129 a month, users will receive a combination of any three items at time--the idea being that you could introduce a new rental piece into your daily wardrobe.

The model, it should be noted, isn't unique. Recent entrants include StitchFix and Le Tote, which bill themselves as online personal shoppers. Yet Hyman insists that RTR's service is not your average "box of the month club." It is more flexible than the competition's, as users can swap out an item for another in just 24 hours, and they can choose what goes in their box. However, the $129-per-month price point is somewhat expensive compared with that charged by StitchFix--a $20 style fee per shipment, plus the cost of the five items, which average at $55. 

The beauty of the new stores is their interplay with other elements of the business. "The stores are branding mechanisms," Hyman explains, noting that RTR now attracts in-person shoppers, who often become online shoppers. She adds that in-person shoppers also tend to spend more, since customers tend to shell out for what they can see and touch--for instance, additional accessories or a colorful rental at a higher price point.

Marshal Cohen, the chief retail industry analyst with the NPD Group, sees the brick-and-mortar expansion as a great move for the company. "There are a lot of restrictions that make the solely online environment challenging," he says. "What Rent the Runway is doing is looking to see how else they can apply themselves instead of just relying on online social media to drive the growth."

Still, he warns that RTR will likely face considerable competition in the future. "The challenge in this environment, if they are successful, is [the] competition to come," he says.  

Published on: Nov 13, 2015