Law for the Entrepreneur Ditto Case Study Questions

For the exclusive use of T. Haidar, 2022.CASE: E-508
DATE: 02/12/14
REVISED: 02/17/15
DITTO
You gain strength, courage, and confidence by every experience in which you really stop to look
fear in the face. You are able to say to yourself, “I lived through this horror. I can take the next
thing that comes along.” You must do the thing you think you cannot do.
—Eleanor Roosevelt, former First Lady of the United States1
It was 2013, and Kate Doerksen,2 founder and CEO of Ditto, was facing a difficult decision.
Three years earlier, she had started Ditto, an eyewear e-commerce company with advanced
virtual fitting technology. Despite encountering many obstacles along the way, she had
successfully launched a business and her vision for the company was slowly becoming a reality.
However, now a number of lawsuits threatened to destroy everything that she and her team had
built and Doerksen had to determine the best course of action to take.
THE ENTREPRENEURIAL CALLING
Early in her life, Doerksen knew she wanted to be an entrepreneur. She majored in
entrepreneurship at Ball State University, where she built the business plan for
HooplaRecruiting.com, an online recruiting platform for college sports. In 2005, she graduated
from college with the angel capital she needed to found Hoopla. A couple of months later, her
entrepreneurial career was placed on hold when she was drafted into the Women’s National
1
“The Remarkable Eleanor Roosevelt,” November 7, 2012, http://www.legacy.com/news/legends-and-legacies/theremarkable-eleanor-roosevelt/1214/ (February 2, 2014).
2
The names of some companies and individuals have been changed to protect their privacy.
Julieta Duek (MBA 2013) and Lecturer Fern Mandelbaum prepared this case as the basis for class discussion rather
than to illustrate either effective or ineffective handling of an administrative situation. The 2015 revision was
prepared by Jessica Morgan (MBA 2012). All information in this case is based on interviews with Kate Doerksen,
co-founder and CEO of Ditto, unless otherwise noted. Interviews were conducted from November 2013 to February
2014 (and January 9, 2015).
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Ditto E-508
p. 2
Basketball Association (WNBA) to play for the Connecticut Sun. She shut down Hoopla,
returned the funds, and moved to Connecticut. After a few months in the WNBA, Doerksen was
cut from the team.
From there, Doerksen was recruited to an investment banking position at Citibank. Having lived
in Evansville, Indiana, all her life, she was excited about the prospect of living in New York
City, so instead of returning to entrepreneurship she took the position with Citibank. This was a
great learning experience for a 22-year-old, and it was where she discovered her passion for the
retail industry.
After her two-year contract at Citibank came to an end, Doerksen moved to Chicago to join the
private equity firm Wind Point Partners, where she worked for the CEOs of several retail
portfolio companies. This experience gave her the experience she felt she needed to pursue her
next entrepreneurial endeavor in retail. After two years with the firm she applied to Stanford
Graduate School of Business (GSB) to gain the skills to launch her next company.
I can remember very clearly a good friend of mine who worked at the
private equity firm with me. He loved his job and I watched him zipping
through the financial model excitedly trying to figure out the return. I
thought: wow, I do not feel like that about this work. It’s time. I realized
at that point I was born to be an operator. I had to go build something
myself.
CRAFTING THE IDEA
In September 2009, Doerksen arrived at Stanford with one clear goal: starting a business in ecommerce. Doerksen was eager to address some of the issues that she had seen over and over in
her past jobs: huge inventory and rent expenses, tough working capital cycles, high product
returns, and excess merchandise, among others. Doerksen saw the potential for a different type
of retail company, and she wanted to be the one to build it.
Doerksen spent most of her first year in the MBA program figuring out what specific part of ecommerce interested her. She paid special attention to retail categories that had not moved
online in a meaningful way. During this exploration, Doerksen realized that virtual fitting
technology could be the key enabler for the transition to e-commerce of those lagging categories.
Virtual Fitting Technology
Doerksen believed that mass merchandise did not work for most people, and that e-commerce
effectively solved this problem by offering a larger selection of products, and often at lower
costs. The missing link was allowing people to try on that larger selection of merchandise.
Existing virtual fitting tools at the time did not work in a realistic manner. They consisted
mostly of photo-on-photo overlapping, without really addressing correct fit or size. The tools
were too far from mirroring reality and, as a consequence, did not provide meaningful
information to the customer. Proof of this fact was that when online retailers started offering
virtual fitting technologies, conversion rates did not improve. Many other tools were far too
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Ditto E-508
p. 3
complex or impractical; some were simply awkward, or far too complicated. For example, one
technology required the person to be nearly naked for the virtual fitting, making customers
uncomfortable.
Doerksen took as many start-up oriented courses as she could and spent her spare hours at the
engineering school talking to professors and students about computer vision.3 She thought that
computer vision could be the solution to having a robust virtual fitting system at home. The
problem was that, at the time, computer vision required controlled settings—it had to be done in
a kiosk, with a specific background, or with a specific camera. Despite the limitations, Doerksen
could envision the perfect solution in her head, and was ready to face the challenges ahead.
The Eyewear Market
During her second year at the GSB, Doerksen refined and narrowed her original vision. She
decided to focus the technology on eyewear virtual fitting instead of full-body virtual fitting, for
four main reasons:

First, from her talks with engineers she realized that developing a robust full-body
technology would be very time-consuming, most likely taking years of development.
The elasticity of fabrics made virtual fitting of clothes very complex, and she refused to
settle for anything that looked cartoony. Eyewear, in contrast, was made of solid
materials, mostly plastic, metal, and glass, which meant the online fitting process would
be far simpler.

Second, the eyewear market was very large ($35 billion in North America, and $70
billion globally4), but there were no major online players at the time. In Doerksen’s
research, she noted a large number of online searches for designer prescription glasses,
demonstrating the market demand. She believed she could utilize search engine
optimization (SEO) to quickly build a brand in this space.

Third, from a user interface point of view, creating a three-dimensional virtual image of
the full-body with a webcam was unnatural. The user had to stand halfway across the
room while operating the webcam in the computer. However, a user could capture a
video of his/her face with a webcam while staying in the natural typing position.
Doerksen confirmed these hypotheses when she conducted a user testing study.

Fourth, Doerksen was concerned that people would have greater privacy concerns about
the body than the face; facial-fit virtual technology was not likely to make most people
uncomfortable.
3
Computer vision is a discipline that studies how to reconstruct, interpret, and understand a three-dimensional (3D)
scene from its two-dimensional (2D) images in terms of the properties of the structures present in the scene. It is
concerned with modeling and replicating human vision using computer software and hardware. For more details on
this technology, see Rensselaer Polytechnic Institute, “What is computer vision?”
http://www.ecse.rpi.edu/Homepages/qji/CV/3dvision_intro.pdf (January 15, 2014).
4
The Vision Council, January 2014.
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Ditto E-508
p. 4
This is how Doerksen’s vision evolved and became Ditto, a prescription and non-prescription
eyewear e-commerce company with advanced virtual fitting technology. The name Ditto
referred to the virtual fitting videos that enabled online customers to try on the glasses virtually.
These videos were also commonly called Dittos by the company and its users.
FINDING A COFOUNDER
As soon as she started the MBA program, Doerksen began looking for potential cofounders.
Personality fit and trust were very important to her. Two of her closest friends at the GSB had
worked together to cofound a company of their own. Watching her friends work together,
motivating each other and having a great time, Doerksen realized how lonely it could be for a
solo entrepreneur. She started pitching Ditto to her classmates, in search of a cofounder. After a
few weeks, two classmates showed interest in joining the effort; both were smart, with a similar
professional background to Doerksen. One of them, Lucas Randolf, had some experience in
marketing, which Doerksen felt was important for a retail company.
Doerksen began making a list of the skillsets she believed that the perfect partner needed to have
to fill the gaps that currently existed in the business. According to her assessment, the ideal
cofounder would have a technical background, with skills that complemented her own.
Although Randolf didn’t fit this criteria, she already knew him very well, trusted him, and he
complemented her skills with his marketing background. She considered asking him to join the
team and finding a third cofounder with a technical background.
Doerksen also had been following some impressive developments in augmented and virtual
reality emerging from Russia. Through a classmate, Doerksen was introduced to Andrew Filev,
founder and CEO of Wrike, the leading provider of social project management software. Filev,
who was well connected to the Russian community in Silicon Valley, became an advisor to
Doerksen. He suggested that Doerksen meet Sergey Surkov5, a software engineer working for
Google at the time. Surkov did not have specialized experience in computer vision but,
according to Filev, was very talented and could acquire any necessary skills quickly.
Doerksen thought it was worth meeting any smart engineer, and arranged to meet with Filev and
Surkov for brunch. Doerksen pitched the Ditto concept to Surkov, who replied that the idea was
very cool, but impossible to build—or not feasible in the way Doerksen was describing it.
Immediately after his pessimistic response, Surkov started diving into the technical specifics of
what could indeed be done, the limitations they would need to consider, and how he could do it.
As time went by, Surkov decided to quit his job in order to pursue an entrepreneurial path.
Doerksen and Surkov met more frequently, and he quickly started building software and
prototypes to test various hypotheses he had about the technology.
At the same time, during one of her classes at the engineering school, Doerksen met Laura
Sindam, a PhD student in computer vision. Doerksen started pitching ideas to Sindam and
asking her if these ideas were feasible. Sindam was very positive about Doerksen’s ideas and
5
In reality, there were two technical co-founders, Sergey Surkov and Dmitry Kornilov, but, in order to simplify the
story, we have focused on one.
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Ditto E-508
p. 5
did not express concerns about the technology, and seemed very engaged with the venture.
Sindam did not have any work experience outside of the academic sphere, and Doerksen had not
seen specific developments for the virtual fitting technology from her. Considering Sindam’s
background, Doerksen thought she could be the perfect partner for the challenges Ditto presented
but she did not have any evidence to support this.
This was an important decision, and Doerksen felt that she had to formalize the relationship with
one of her prospects soon, or she risked losing them all.
BUILDING THE TEAM
Doerksen also had to define and start building the operations for the business. The basic
purchasing process called for a well-choreographed routine. The customer placed an online
order for a pair of prescription glasses, and supplied a lens prescription. Non-prescription
sunglasses could also be ordered. Ditto ordered the brand and model directly from the supplier,
which sent the glasses frame to Ditto’s laboratory. The laboratory would add the lenses
according to the prescription, pre-adjust the frame, and then ship the glasses to the customer. So,
Doerksen started building relationships with the suppliers and setting up fulfillment logistics,
including finding a laboratory and warehouse.
After a rough start, one year of hard work, and several trips to New York and the Midwest,
Doerksen convinced twelve major eyewear brands to sell through Ditto. Most importantly, she
negotiated contracts that allowed Ditto to keep little or no inventory by accessing real-time
inventory information from the suppliers, which they typically did not provide to anyone outside
their companies.
Now Doerksen needed to set up the fulfillment logistics. Following the example of Zappos, an
online shoe and clothing company that initially fulfilled from San Francisco, she started looking
for lens laboratories in the San Francisco Bay Area. It also seemed logical to have the
fulfillment center in the same area as the rest of the team.
Building an entire lens laboratory exclusively for Ditto made no sense economically. This would
require a significant investment in equipment, in addition to certifications and specialized
knowledge. So the plan was to partner with an existing laboratory that would cut and fit the
prescription lenses. In the following weeks, Doerksen visited almost every laboratory in the Bay
Area, and made a list with the specifications she was looking for in a partner lab. An important
requirement was the ability to carry out electronic ordering. The lens laboratory industry at the
time was fairly unsophisticated, so this requirement greatly limited the list of potential
candidates.
Doerksen started analyzing the logistics chain and estimating the cost of operations. Most of the
suppliers’ warehouses were in the Midwest, so the frames would go from the Midwest to
California, where the lenses were added, and from there be shipped to the customer. The frames
would take three to five days to get from the suppliers in the Midwest to Ditto’s fulfillment
center in California. So, delivering to a customer in New York would take a minimum of six to
eight days, far longer than Doerksen believed could be considered a good customer experience.
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p. 6
After analyzing several alternatives, Doerksen came to the conclusion that Ditto needed a second
location in the Midwest for the fulfillment center. Ideally, the location had to be within one hour
of Louisville, Kentucky—where UPS Airlines is headquartered—or Memphis, Tennessee, the
location of FedEx corporate headquarters. In this way, the new location would shorten
fulfillment time, as well as reduce overhead costs.
Around the same time, Doerksen’s father Thom Endress retired as general manager of Crescent
Plastics, a plastics business with about 350 employees. When Doerksen started assessing
laboratories in the Midwest, her father would sometimes carry out the initial visit. Being newly
retired, with some free time, Endress did an informal market study with optometrists asking them
which was the best laboratory in the area. Endress told his daughter:
You’re not going to believe this, but even people in Illinois and Kentucky are
using this lab in Evansville, Indiana, called Singer Optical. I went in there today
and these two brothers that run it seem excellent. Their operations are more
sophisticated than most of the places I’ve been.
Being from Evansville, Doerksen realized she could also leverage her personal network there to
hire a great team. To top it off, Evansville was a less than two-hour drive to Louisville’s UPS
Airlines headquarters.
Fundraising
Doerksen created a pitch deck, got introductions to dozens of venture capital firms, and applied
to several business plan competitions. However, every time she pitched Ditto, venture capitalists
(VCs) would question Endress’ involvement in the business. As Doerksen recalled:
Each one of them had seen investments go sideways because family dynamics
caused personal disputes or resentment with other employees. I couldn’t blame
their logic.
Contrary to the potential investors, Doerksen saw her father, in his role as Vice President of
Operations, as one of the company’s key employees and one of the few people she trusted to
create the culture she wanted in the Indiana operations. In only a few months, Endress was
helping Doerksen build a team in Evansville and scale operations. Endress was running the
fulfillment center like clockwork. His 30 years of management experience and his knowledge of
the plastics-cutting business proved to be very helpful. Investors, however, remained troubled.
Some were concerned that Doerksen would play favorites within the organization or would
develop a reputation externally as a “Daddy’s girl.”
Doerksen decided to start recruiting candidates for general manager of Ditto’s Evansville
location. She wanted to interview at least a dozen candidates, but she could not find that many
people who wanted to live in Evansville and had the qualifications she was looking for. After
numerous interviews, Doerksen had one potential candidate, Lisa Carrell. Carrell had four years
of experience managing one of the warehouse operations of a glass manufacturing company.
Carrell was not totally convinced about moving to Evansville, but said she would do it for a
higher salary. With the salary bump, Carrell’s salary would be much higher than Endress’
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Ditto E-508
p. 7
salary. Doerksen’s trust in her father, paired with his experience in the field, and Carrell’s higher
salary requirement, made Doerksen question if this was the right decision.
The funding process moved forward and by November 2010 Doerksen had six potential
investors interested in funding Ditto. Three of them had made clear that they would not invest if
there was a family member on the team. Of the remaining three venture capitalists, one potential
investor, Howard Hartenbaum from August Capital, showed some flexibility. He asked
Doerksen, “Could you fire him if needed? If you could, then we might accept it.” Hartenbaum
was still reticent and Doerksen was concerned about the issue becoming a source of friction in
the future.
While she was still in discussions with other firms, to date, Doerksen had only received one term
sheet with a firm offer to fund the company. This term sheet was from one of the top VC firms
in Silicon Valley but it was conditional on firing her father. Doerksen was certain that her father
was the best person Ditto could find for that job. However, the company needed the funding,
and only one other investor had shown any openness to accepting Endress on the team.
THE PRODUCT LAUNCH
After a year of hard work and many obstacles and delays, Ditto.com officially launched on April
26, 2012. Ditto.com’s first weeks were overwhelming, with a very positive response from
customers, and sales higher than expected. The product was live, but there was still a lot of room
for improvement. Doerksen explained:
I think people have this notion that anytime you launch a new product, the doors
are just going to blow off, and your concerns will all be about controlling your
explosive growth. It’s just not true for most companies, even successful ones.
Our first six months were incredibly up-and-down! Acquiring customers
consistently is even tougher than building a great product.
The amount of work was prodigious. The team prioritized the workload and quickly tackled the
key problems. When the website launched, only 50 percent of people who attempted to use the
try-on technology were successful. After a few months, Ditto’s success rate grew to more than
80 percent.6 The team also started measuring the quality of the Dittos (virtual fitting videos) and
improving them.
On the marketing side, Doerksen hired an experienced product manager who rebuilt the
company’s analytics and optimized the website for SEO. Shortly thereafter, efforts started
translating into results: greater traffic, higher conversion rates, more sales, and increasingly
efficient operations.
Things were progressing well for Ditto. The business was healthy, growing, and, perhaps most
importantly, customers were raving. In only a few months, more than 50,000 users had created
6
The Ditto conversion rate is the percentage of attempts to create a virtual fitting video (called a Ditto) that are
completed successfully.
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p. 8
Dittos; the sales conversion rate was five times higher than the industry average (5 percent for
Ditto versus 1 percent average for multi-brand e-commerce eyewear); returns were five times
lower than the industry average (5 percent for Ditto versus 25 percent average for e-commerce
eyewear); and the team had grown to 16 people in two locations.
LEGAL TROUBLE
In early 2013, Doerksen received an unexpected e-mail from a high school friend working at a
law firm in Indianapolis. Alarmed, Doerksen’s friend asked her, “Did you know that you’ve just
been sued?”
Doerksen immediately contacted her lawyers to figure out what was going on. The lawsuit was
filed by 1-800-Contacts. This company was a division of WellPoint Health Networks, a
corporation that reported $61.7 billion in revenues in 2012, and ran Blue Cross Blue Shield and
Anthem in several states. WellPoint had acquired 1-800-Contacts for close to $900 million in
2012.7 Initially, 1-800-Contacts sold contact lenses, but had expanded in June 2011 with
Glasses.com, a direct competitor of Ditto.
Before launching Ditto, Doerksen and the team had thoroughly investigated the existing
intellectual property (IP) patents in the space. There were over 300 patents in augmented reality.
The advice from Ditto’s lawyer was to check that Ditto’s technology did not replicate anything
exactly as it was described in the claims in those patents. Doerksen recalled the results of their
analyses:
Before we launched, we had done our homework on what IP existed in the space.
And we said, “Okay, good. No one is approaching virtual try-on the way that we
do it.” So we ended up filing for two patents even before we had a website. The
problem is that it takes two to three years for the patent to be issued. So at the
time this lawsuit hit, we were still waiting to hear back on our patents. In that
timeframe after your application but before your patents issue, you are very
vulnerable.
Doerksen also found out that the executive team of 1-800-Contacts had created their own Dittos
on Ditto.com. This happened about a month before 1-800-Contacts purchased the patent they
were using to sue Ditto. Doerksen was convinced that Ditto’s technology did not infringe upon
the pre-existing patent that 1-800-Contacts bought. However, she knew that it did not matter—
“products have nothing to do with intellectual property law.” Defending their position would
cost Ditto an estimated $2 million to $3 million and take over two years of work.
To make things worse, two weeks after being served with the 1-800-Contacts lawsuit, Ditto was
sued again for patent infringement. Doerksen explained her reaction:
7
“WellPoint Acquires 1-800 Contacts,” The New York Times, June 4, 2012,
http://dealbook.nytimes.com/2012/06/04/wellpoint-acquires-1-800-contacts/?_r=0 (January 8, 2014).
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p. 9
I realized it doesn’t matter if you infringe. All it takes is an allegation for this to
become a huge problem for your business.
The second lawsuit came from Lennon Imaging Technology. After doing some research,
Doerksen concluded that this lawsuit was probably not of a competitive nature like the one from
WellPoint. Instead, this challenge seemed to come from a patent monetization firm, also known
as a patent troll,8 which had sued a number of other people and companies. Doerksen thought
the company was probably looking for a settlement slightly lower than the cost of fighting the
lawsuit, which would likely be in the $50,000-$100,000 range.
Ditto’s lawyers communicated first with 1-800-Contacts to find a possible solution. As
Doerksen expected, 1-800-Contacts was only interested in an injunction, requiring that Ditto
stopped using the technology. For Doerksen, this meant that Ditto had to close its operations.
Ditto was in serious trouble. Even if the plaintiffs agreed to settle, Ditto did not have enough
money to pay them. Doerksen reached out to her early investors who explained to her that
raising more funds was not a solution. Doerksen understood the response very clearly. She
knew that the lawsuit from 1-800-Contacts would not go away. No matter how much money
Doerksen could find, she believed that this lawsuit would keep draining Ditto until it was
completely out of business. She even feared the company would keep buying more patents to
pile on the litigation costs.
Doerksen tried to find a law firm that would take Ditto’s case on a contingency basis (getting
paid only if the case ended up successfully for Ditto.) She talked to 72 different law firms.
Some of them offered a free letter of opinion, or were willing to volunteer for a few hours. But
none would take on such a big case for equity.
Three years of hard work seemed to be going to waste. Doerksen was devastated:
My cofounder and I were sitting outside the lawyers’ office, and we just couldn’t
even look at each other. I was fighting back tears, and we were so emotionally
wrought. After all this, we were going to have to sell our company for peanuts.
A Sale Process
Over the course of the next couple of months, Doerksen started a sale process. Ditto soon had
four strategic buyers interested in Ditto. The firms offered a $3 million to $4 million valuation
for Ditto and wanted to employ Doerksen with a good salary after the acquisition. The firms also
offered employment for her engineering team but did not want to keep the Indiana team on staff.
8
A patent troll, also called a patent assertion entity, is a person or company who enforces patent rights against
accused infringers in an attempt to collect licensing fees, but does not manufacture products or supply services based
upon the patents in question, thus engaging in economic rent-seeking. Source: Wikipedia,
http://en.wikipedia.org/wiki/Patent_Troll (January 6, 2014.)
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p. 10
Given the pending lawsuit, however, this would be a positive outcome for investors, returning to
them all of their investment and a small return. The founders would earn a few hundred
thousand dollars each. Doerksen’s investors did not intervene and left the final decision about
whether to sell the company to the management team. They believed in the team and their vision
but were concerned about whether Doerksen and her team had the energy and resources to fight a
protracted legal battle. Doerksen saw selling the company as the logical option given the
predicament, but struggled to reconcile herself with the injustice of the situation.
Fighting the Patent Trolls
In parallel, she channeled her frustration into action, becoming an activist for patent reform and
seeking support for the Ditto case. Consequently, the Electronic Frontier Foundation, a nonprofit
organization that fights bad litigation, and other similar organizations rallied around Ditto and
lent Doerksen public support. The Ditto team also ran an Indiegogo crowdfunding campaign to
create awareness about the patent situation and raise funds for legal expenses by selling T-shirts
that read “I Beat Trolls.”
A Partnership Opportunity
At an IP regulation conference, Doerksen met Erich Spangenberg, the founder of IPNav, one of
the largest patent monetization firms in the country. Spangenberg approached Doerksen with a
bold proposal. He offered to handle the two lawsuits against Ditto in exchange for $1 million in
Ditto’s equity. At the time, Doerksen was spending up to 70 hours per week dealing with Ditto’s
legal matters and was eager to have more time to focus on the day-to-day operations of the
business.
Doerksen was intrigued by Spangenberg’s proposal, but she was wary about partnering with him.
She saw every player in the patent troll industry as immoral. Although IPNav was not in the
business of suing start-ups, the firm was still considered part of the industry that Doerksen had
publicly admonished for taking down Ditto.
Doerksen conducted her due diligence on Spangenberg’s firm and spoke with companies he had
invested in previously. These companies gave him positive reviews and Doerksen was
convinced that his primary motivation in this deal was to profit from his investment in Ditto.
However, she knew that even if she accepted his proposal the company could still run out of
funds before the case was settled. Ditto had less than $500,000 left in the bank at the time.
Doerksen had already laid off six employees and the founders had stopped taking a salary to
lower Ditto’s expenses.
Doerksen and her cofounder were torn. Should they sell the company they had built with so
much effort? They were already a few months into the sale process. The alternative was
partnering with Spangenberg to fight back against the litigation. This was a controversial move
that would put Doerksen’s credibility at risk with no guarantee of a positive outcome. Doerksen
had to make a decision quickly as Ditto was running out of funds and her team could not
continue to fight the legal battle on their own.
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Law for the Entrepreneur
Ditto Case Study Questions
1. How did Doerksen’s overall idea develop? What were the main factors
influencing this evolution?
2. Evaluate Doerksen’s process for finding a cofounder. What were the main
factors that she considered and how did these factors ultimately influence
her decision?
3. Should Doerksen keep her father on the team or should she concede to the
demands of the potential investors? Why?
4. Should Doerksen sell the company or try to fight the lawsuits? Explain the
reasons for your recommendations.