VENTURE CAPITAL SHOULD FUEL YOUR COMPANY, NOT YOUR EGO: 6 CRITICAL
LESSONS FROM THE FALL OF FAB.COM
INVESTORS,
SOMETIMES FAILURE ACTUALLY MEANS FAILURE.
If there is one case
study in startupland that will haunt investors and entrepreneurs for years to
come, it's Fab.
The former
design flash-sale site pivoted
more times than Madonna reinvented herself—and today, the sorry story of Fab came to an
anticlimactic resolution. After raising $325 million from everyone from Andreessen Horowitz to China's Tencent
at a billion
dollar valuation,
the shell of Fab's formerly fab self (sorry) has finally sold to PCH for, reportedly, a meager $7 million in cash and $8
million in stock.
How did this
once Internet darling unravel so spectacularly? For entrepreneurs and investors
looking to avoid the same mistakes as Fab, here are six lessons to extract from
this e-commerce train wreck:
Investors, Sometimes
Failure Actually Means Failure
Fab cofounder Jason Goldberg has a track record of running startups into the ground.
Earlier in his career, he founded a search
engine called Jobster—and
managed to vaporize $48 million in funding before the company was sold for parts. "I
was this poster child in Seattle of this guy who had burned through VC money,
like a pariah," Goldberg
told Fast Company in 2013. But Silicon Valley investors, who tend to view startup
"failure" as a virtue, ignored the red flags—and Goldberg managed to
talk investors into throwing a whopping $325 million at Fab.
It's Dangerous To Grow
Too Fast
In 2013, two years
into Fab's business, Goldberg tried to evolve the company from a flash-sale
site to a
traditional online
retailer. But instead of just
mastering the fundamentals of e-commerce—an elusive enough exercise for a
founder who never worked in retail—Goldberg also decided to pursue a number of
other ambitious tweaks to his business model, which included operating its own
warehouses, manufacturing private
label products, and acquiring
startups in Europe to expand internationally.
"I would say that
a lot of Fab in the last 18 months has been go, go, go, go, and we'll figure it
out later," Goldberg
told Fast Company that year. Fab investor Allen
Morgan, an adviser
with Mayfield Fund, admitted back then: "When you grow this fast, it's very
hard because things can fall off the table and break before you catch
them."
Nevertheless, Goldberg
managed to raise $105 million to fund all his frenetic expansion. Of course, only months
after opening a five-story office in Berlin, they virtually shut it down, laying off the majority of its European workforce.
Beware The Perpetual
Pivot
Fab's original pivot
in 2011 from Fabulis,
a gay social networking site, to a flash-sale
design site was a smart,
strategic move. The founders (Goldberg along with best friend Bradford
Shellhammer) recognized a real
hole in the design market.
But after the flash
sale site became an e-commerce
site for designers,
then morphed into a private label design retailer sourcing from Asia, and then turned into
a customized furniture
site, Fabbegan to look more like a business parody than a company with an actual strategy.
(Ultimately, Goldberg pivoted his way into another company, Hem,
a custom furniture
spin-off of Fab which
he's now running.)
Building A Startup Is
A Marathon, Not A Sprint
As the company's
leader, Goldberg always appeared more motivated by quickly reaching amorphous
milestones than achieving sustainable economics.
At an internal
company meeting Fast Company attended
in 2013, Goldberg regaled his staffers with the many records Fab had broken:
"I have done at least 100 investor pitches in the last three months,"
he said. "We will be the third-fastest company in history to be valued at
a billion dollars. We will be the most heavily funded private e-commerce
company in the past 10 years."
Goldberg should have
paused to catch his—and the company's—breath. Just a few months after he made
all those boasts, Goldberg found himself laying off much of his staff—a trend that would continue until the
once 700-person New York-based company was ultimately a shell of its former
self.
Venture Capital Should
Fuel Your Company, Not Your Ego
Every time Goldberg
had a new idea for how Fab's business should shift, he went to his investors,
who willingly fueled Goldberg's impulsive acts—even when they were fueled more
by egotistical goals than practical needs.
In late 2011, he
wanted to boost Fab's sales from $20 million a year to more than $100 million,
so he raised $40 million to expand operations.
By 2013, Goldberg had
filled Fab's coffers with another $165 million at a $1 billion valuation by
selling an outlandish dream to China's Tencent, among other investors, that Fab
would become the fifth e-commerce company in the world worth more than $10
billion.
"Money should be
hard to come by," says Rob Forbes, the founder of Design Within Reach and a Fab adviser. "If
it [money] comes easy, then you have to have really good people around you who
are keeping you honest."
Like Goldberg, most of
Fab's investors weren't experienced in design
retail, so all of Goldberg's
moves—no matter how irrationally aggressive—either appeared logical or were
fueled by collective, naive fantasy. "Private label, exclusive
partnerships, licensing from designers—these are things every retailer tries.
It keeps their heads above water, but it doesn't accelerate the growth of
anyone's business," says Sucharita
Mulpuru, an analyst with Forrester Research. "It sounds new to
their foolish investors, but it's not going to be the game changer they are
hoping it is."
A Founder's Goal
Should Be To Build A Business—Not to Cement Their Reputation As An Icon
Goldberg fancied
himself a philosopher entrepreneur, regularly sharing his wisdom on his now-defunct Betashop blog.
He also liked to put
himself and his unproven business acumen in the same category as tech's
greatest mavericks. "If you look at companies that have succeeded over the
last 20 years—Steve Jobs, Jeff Bezos, Bill Gates—they owned it," said
Goldberg, referring to his
control-freak impulses. "You have to be obsessed with the details."
Goldberg's drive to
win (whatever that might mean), his fanaticism about building a massive
company, and his urge to cement his status in history ultimately distracted him
from the unsexy details of actually building a great company.
"Either Fab will
be worth four or five billion dollars in three or four years from now, or Fab
will still be worth a billion dollars," Goldberg told
us back in 2013.
But, as we predicted,
he left out one other scenario. The one in which, for the second time in his
life, he squanders bales of VC money—but this time it's $325 million, not $48
million.
Unfortunately, we were right.
A Short History OF
Fab.com
2010: Jason
Goldberg and Bradford Shell hammer launch Fabulis, a gay social network,
raising $3 million.
February 2011: They decide to pivot Fabulis to Fab, a flash-sale site for designers. Menlo Ventures led the company's $8 million Series A round.
June 2011: On its first day in business, Fab sells $65,000 worth of product; in less than three weeks, it hits $1 million in sales.
December 2011: Andreessen Horowitz leads Fab's $40 million Series B round, valuing the company at $200 million.
February 2012: To expand internationally, Fab acquires German flash sale site, Casacanda.
June 2012: To continue international expansion, Fab acquires 10-week old U.K. design site, Llustre.
July 2012: European VC firm Atomico leads Fab's $105 million Series C round at a $600 million valuation.
Spring 2013: Fab acquires German customized furniture company MassivKonzept.
June 2013: Fab raises $150 million Series D for Asia expansion at $1 billion valuation.
July 2013: Fab lays off 100 people from Berlin European Headquarters.
November 2013: Fab lays off 50 employees.
February 2011: They decide to pivot Fabulis to Fab, a flash-sale site for designers. Menlo Ventures led the company's $8 million Series A round.
June 2011: On its first day in business, Fab sells $65,000 worth of product; in less than three weeks, it hits $1 million in sales.
December 2011: Andreessen Horowitz leads Fab's $40 million Series B round, valuing the company at $200 million.
February 2012: To expand internationally, Fab acquires German flash sale site, Casacanda.
June 2012: To continue international expansion, Fab acquires 10-week old U.K. design site, Llustre.
July 2012: European VC firm Atomico leads Fab's $105 million Series C round at a $600 million valuation.
Spring 2013: Fab acquires German customized furniture company MassivKonzept.
June 2013: Fab raises $150 million Series D for Asia expansion at $1 billion valuation.
July 2013: Fab lays off 100 people from Berlin European Headquarters.
November 2013: Fab lays off 50 employees.
November 2013: Fab cofounder and chief design officer Bradford Shellhammer steps down
from the company.
May 2014: Fab lays off 90 employees.
June 2014: Fab acquires Finnish modern furniture company One Nordic.
Sept 2014: Based on One Nordic acquisition, Goldberg launches Hem, which he dubs the "Nike ID of custom furniture." The business is ambiguously connected to Fab (Spin-off? Pivot? Unclear).
January 2015: Ex-Fab cofounder Bradford Shellhammer (and design guru of the founding duo) announces he will launch Bezar, another flash-sale site for curated designers.
March 2015: Fab is acquired by PCH, a custom design and manufacturing business, for a reported $15 million in cash and stock. Goldberg steps down as CEO, now runs Hem.
May 2014: Fab lays off 90 employees.
June 2014: Fab acquires Finnish modern furniture company One Nordic.
Sept 2014: Based on One Nordic acquisition, Goldberg launches Hem, which he dubs the "Nike ID of custom furniture." The business is ambiguously connected to Fab (Spin-off? Pivot? Unclear).
January 2015: Ex-Fab cofounder Bradford Shellhammer (and design guru of the founding duo) announces he will launch Bezar, another flash-sale site for curated designers.
March 2015: Fab is acquired by PCH, a custom design and manufacturing business, for a reported $15 million in cash and stock. Goldberg steps down as CEO, now runs Hem.
BY DANIELLE SACKS
http://www.fastcompany.com/3043123/venture-capital-should-fuel-your-company-not-your-ego-6-critical-lessons-from-the-fall-of-fa
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