Sunday, February 22, 2015

What You Can Learn From a ($200 million) Failed Business Model - For Founders Under 40™ Group Members


Even Wal-Mart, early days, never had $10 Million to fine tune its retail business. It perfected it’s system through trial & error, frugality, hard work, patience, one customer at a time. Even Google, early days, built its business by being very resourceful. If you are a tech company or any small business thinking you can build a sustainable business with all the money in the world, let me tell you now...you can’t build a great long lasting business overnight. As I write this, I can’t help but think about Zynga, Groupon, Myspace. However, this post is really about Fab.com rise and fall.



The fab.com story is a very important business lesson for all the founders around the world [including fu40 group members], likely for business ventures sitting on millions of series B funds hoping to be next Amazon..

Thanks to former CEO & co-founder of Fab.com, Jason Goldberg. Thanks to techcrunch, wsj, business insider for their invaluable articles. We are glad to share this with founders.

Business Lessons

  • The website started as a gay social network, but switched to an e-commerce site in 2011.
  • In 2013, the Chinese Internet conglomerate [Other]. was an investor in a $150 million venture round that valued Fab at more than $1 billion.
  • Switched its strategy from flash sales to traditional e-commerce:
  • Once raised $310 million in venture capital funding.
  • Sold to Irish manufacturing company PCH in a deal that worth as little as $15 - 50 million,
  • Fab’s period of extreme growth, it was burning $14 million a month
  • “We spent $US200M in the past 2 years. $US200M!” Goldberg’s letter read. “We spent $US200M and we have not proven out our business model. We spent $US200M and we have not proven that we know precisely what our customers want to buy.
  • Others describe Goldberg as a polarising figure whose behaviour can seem manic. Goldberg was once out of the office for so long that all of the checks on his desk needed to be reissued. Other times he wouldn’t sleep, spending days on end just cranking.
  • He’s a hype man who sometimes struggles to execute. “He is so talented at getting an idea off the ground. Bar none, the best I’ve ever seen,” said a former colleague of Goldberg’s. “But he can’t operate a company.”      Said another: “Jason can talk and sell you water … He convinces himself that what he’s going to do is going to work … Jason had so much energy and passion that he drove you to want to do something. You can’t hate the guy for that — you just wish it would have worked out the way he said it was going to.”
  • A few weeks after its launch, actor Ashton Kutcher and Silicon Valley investors gave Fab $US1 million.
  • By mid-June, the company had 240,000 members with 5,000 new users signing up each day. That August, Fab had half a million users. Investors gave Goldberg a $US7.7 million a Series A round financing.
  • By October 2011, Fab was generating $US100,000 a day. It hired 80 people and grew to 750,000 users.
  • The company finished the year with 1.3 million users and an annual run rate of $US80 million. It closed a $US40 million round of financing at a $US200 million valuation from top Silicon Valley investment firm.

  • Lunch was served daily in the company’s shining new headquarters. Sales rolled in. Employees could watch revenue tick upward on the website in real time. They were encouraged to guess what day and time Fab would break a major new revenue milestone in exchange for a prize. It’s the same game women play at baby showers to guess when a mother will give birth.
  • When new hires were made, Goldberg would shout it out to the entire office, which would erupt in cheer. One former employee said Fab back then felt like Google, or what he imagines it feels like to work at Google. Fab hit 5 million users faster than Facebook.
  • By June 2012, Fab had grown to 150 people and raised $US105 million at a $US500 million valuation. The board approved a plan to rapidly expand Fab’s business and reach $US100 million in sales by year end.
  • Most startups wait until they have established a sturdy business in one country before expanding internationally. But, Fab reasoned, if it could acquire another cheap clone and stake an early claim in Europe, it might be the most cost-effective way to beat [others]
  • Fab acquired three similar European startups that year in all-stock transactions. It bought [Other] in February 2012, [Other] in June 2012, and [Other] in November 2012.
  • Fab sources estimate that moving into Europe prematurely cost the company $US60-$US100 million. There were too many employees and not enough sales generated. Streamlining the businesses was difficult; there was no US playbook to hand over to Europe. Additionally, Fab purchased a $US12 million warehouse there that eventually closed.
  • A former Fab employee recalled. “We sold first, then we took inventory, then we sold and developed our own products. We had all kinds of challenges across all of that, and we had to do it quickly.”
  • The expansion caused Fab to lose its competitive edge. Fab’s early users loved discovering products they couldn’t find anywhere else on the web. But as Fab’s SKUs increased, the originality diminished: Fab products could be found on competing sites like Amazon for less, where they could be shipped faster.

  • Fab’s warehouse workers noticed the first signs of trouble during the holiday season of 2012. Fab generated $US110 million that year, but piles of inventory remained unmoved. Buyers didn’t seem to understand what would sell on Fab. And margins didn’t seem to be taken into account when items were priced and sold on the site.
  • “All the investors were seeing were dollar signs in their eyes,” one former Fab employee said. “Jason had this hunger to get bigger and do more and take on Amazon, even though our customer base loved Fab because it was curating interesting design products … He was just like, ‘I want more stuff’ for the sole reason that he wanted to be more like Amazon.”
  • “We had a team in place for maybe two to three times the revenue that we had,” one Fab employee said. “We had been hiring on growth potential and not actual realities.”
  • But instead of trying to solve problems, Goldberg was inclined to pivot the business.
  • “You can change a business once or twice, but after that you’re drowning,” one former Fab employee said.


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