The Rise and Fall of Fab.com: A Cautionary Tale for Every Entrepreneur

Fab.com is dying.

fab-broken-heartThe ex-gay Yelp, ex-gay Social Network, ex-gay Amazon, ex-Design Flash Sales site struggles on its death bed. The company’s spectacular rise and fall is a lesson in how to go from rags to riches and back to rags again. It is a story on how growth can sometimes make investors, founders and management oblivious to threats.

I was never a big fan of the concept of flash sales. I covered it, I studied it but I didn’t like it. It is short-sighted way of running online retail operations. It is a great way to create market demand. It may even be a good way to develop customer base. But it will not handle growth forever.

Flash sales need three things to function: good-to-great products, relatively low prices and consumers willing to try overpriced merchandise at a discount. All of these factors come at the expense of two very “un-scalable” variables:

  1. a people based supply chain. To make products available at a discount, someone has to find great products, has to estimate demand for those products and then negotiate purchasing. This is a tricky bit because these guys have to take into account a price that is relatively small but helps the flash sale site turn a profit and and allows the manufacturer to actually ship the product. This is very, very hard work and can be done only by skilled individuals who can evaluate demand, find products, negotiate prices and make sure merchandise is delivered.
  2. a demand based on human wants, not needs. No one needs designer shoes or designer furniture. People need shoes and furniture. Sometimes they want designer shoes because we live in a shallow society that makes people feel that objects buy them happiness. And most business pray on these wants. Flash sales sites promise products that say “I am a successful individual”. They promise brands and designer items at a low(er) cost. As a novelty – it will work for a while (for Fab that meant about 2 years). But customers will eventually want new products, at lower costs.
Jason Goldberg on product curation.

Jason Goldberg on product curation.

None of these variables scale very well, because they are human-based. Fab and especially founder Jason Goldberg, the one taking most of the heat have learned this the hard way.

Of course, it easy for me and other bloggers to watch events unfold and point fingers at who done what and why the business model was wrong. It was a bit harder when Fab.com was getting millions and millions in financing and customers were anxious to find new products and buy on Fab in 2012. 

But this post is not about pointing fingers. It’s about looking beyond the failure, at what lies ahead for Fab.

Fab.com: the road so far

Fab started as a gay community service that reviewed local business. In 2011 it pivoted and went on to offer daily discounts to its users, later on connecting users in a form of social network. As the model didn’t really took off, founders Jason Goldberg and Bradford Shellhammer decided they need to pivot yet again and rethink their market.

As it seems, the duo thought the company was great at a very specific thing and decided to focus on that: design. Specifically: interior design. They re-positioned Fab.com as a source for inspiration and sales of design-related products.

The rise

One can of course notice the stereotypical positioning (being a former gay community) but it nevertheless worked. The response to this new pivot was great. The number of registered users went form 175 000 in June 2011 to 350 000 in just a month. In just 12 days the company sold more than $600k worth of merchandise.

The new Fab.com was available by invite only and when it opened more than 125 000 had already registered to receive offers. The reviews were awesome and in just a short month after the Fab relaunched, Menlo Ventures invested $8 million in the company.

Fab’s usage of social networking and social-shopping features further increased the number of users and sales for the company. In just 5 months since launch (nov. 2011) the company boasted over 1 million registered members. Then came the holiday shopping season and sales skyrocketed. As a result of fabulous sales and increasing media traction, Andreessen Horowitz invested … wait for it … $40 million.

In 2011-2012 Fab was just killing it. Sales reached $100 million

In 2011-2012 Fab was just killing it. Sales reached $100 million

After just 7 months since relaunch, on Dec. 7, legendary Andreessen Horowitz VC’s are chosen by Fab.com founders from 15 willing investors.

At the end of 2012 numbers are in and they show a spectacular growth fueled what went from a 4 people company to a 140 employee design force.

CEO Jason Goldberg then posted on its now gone blog “Betashop” a slideshow detailing the successful year his company had. It shows the brave startup growing from a small yet promising group of passionate people to a company selling in 26 countries, with 10 million members.

In 2012 Fab sold over 4.3 million products. During the holidays that meant a rate of 17 products sold per minute. While other companies still try to cope with the idea of mobile commerce, Fab’s sales in 2012 had 33% of all sales coming from mobile. During holidays, 56% of sales came from smartphones and tablets.

The customer lifetime was great and two out of three purchases came from repeat customers. In 2012 sales grew 600% over 2011 and Goldberg boasted that Fab’s 15.000 products were 33% more than IKEA’s. Fab was the largest design store.

Jason Goldberg's statement on Fab, 2012. Source.

Jason Goldberg’s statement on Fab, 2012. Source.

The fall

In hindsight, past the astonishing numbers, some statements showed something was not exactly right. There was a sense of too much pride: everything Fab was doing was absolutely great and everybody else was just the loser left behind. Jason felt like Fab was the only company with the right attitude and operations. Even Amazon and IKEA didn’t seem like a match for them.

The company was so incredibly self-assuring that it was doing everything internally. In 2012 it employed more than 600 people across the world, it built and operated its IT systems in-house, it even built its own warehouse. How ’bout renting, man?

The 2012 presentation goes on and on about the greatness of Fab, about superstar employees, about the huge vision ahead, about how Fab has to beat IKEA and Amazon at design and deliver more than $30 billion in sales. In the end Jason shows a 6 point plan on how they’ll achieve that:

  1. Have personality
  2. Sell stuff they don’t
  3. Lead on mobile
  4. Lead on social
  5. [Be] global
  6. Be the best company to work for

These 6 points up there - these are the reason Fab failed. What they leave untapped is just what matters. They are all great for rallying the troops but they lack substance. Amazon and IKEA’s steady growth happens from the ground up. The infrastructure these companies rely on to build, handle, ship and sell products – these are their secret weapons.

Marketing is just the illusory panacea startups reach for when hoping it would suffice in their struggle against the big guys. It doesn’t. That’s where they get their smaller competitors.

Retail, even if it happens online, is a logistics game. Walmart, IKEA and Amazon manage to stay on top with a lot of help from their supply chain. Everything moves smoothly behind the scenes and that’s what Fab failed to acknowledge. By spending too much time on social media, mobile and interviews, the management failed to see the large logistic wall that suddenly halted their growth.

In 2013 things got from great to bad and then to awful. The company did raise an additional $150 million in venture capital in July 2013 but as CEO Jason Goldberg these were definitely not great news:

“What a lot people don’t know is that we set out to raise $300 million. [...] And when you set out to raise $300 million, and you raise $150 million, you have to change your business plan. And that’s what we did.”

Jason Goldberg

The change of business plan meant a lot of things that hurt the company’s credibility. Layoffs throughout its offices left employees unhappy. The company had to reconsider its position. At the turning point it was burning through $14 million each month and still not reaching sales projections.

Fab.com traffic dropped abruptly. Source

Fab.com traffic dropped abruptly. Source

The job cuts took Fab from more than 750 employees to less than 380 at the end of 2013. It started in Europe and than spread through its offices. Every office was restructured to help the company reach a balance point. It didn’t. Even C-level executives had to take a hit. It’s unclear if they left willingly or have been laid off but Co-founder Bradford Shellhammer and COO Beth Ferreira left the company.

Meanwhile traffic came down abruptly and so did sales. The company was heavily relying on ad spending to reach customers. Its 2012 marketing costs were $40 million. In 2013, the figure dropped to $30 million. But as the chart on the right shows – that was not the only factor that lead to the drop in traffic and sales. People were just not interested in Fab’s products anymore. Buzzwords and social media didn’t cut it anymore.

Fab.com's traffic dropped both on the web and mobile. Source.

Fab.com’s traffic dropped both on the web and mobile. Source.

Hem.com – The rebirth?

hemAll these bad news took the company by storm. A lot of people took shots directly at Goldberg for shifting focus, delaying layoffs and generally the could-be death of Fab.com. It was not surprising: he was the one taking the spotlight when Fab was growing, he would be the one taking the heat for the fall.

The media took turns at hitting Fab.com whenever it could and it was obviously an easy task. There were plenty of laid-off employees out there to leak inside info about how bad the company was being ran. They were jobless, pissed-off and needed someone to take the blame.

How could a company with $336 million in funding fail so bad? Where did the company on everyone’s lips go? What happened with all that value investors just …  lost?

All these questions left out some seemingly uninteresting investments Fab was running in Europe. While dealing with layoffs, decreased sales, management layoffs and media hits, Fab acquired custom furniture companies MassivKonzept and One Nordic Furniture Co..

By doing so the company combined the MassivKonzept’s mass customization tools and One Nordic Furniture Co.’s talent and technology. The new company took over Fab’s sales in Europe and now leverages Fab’s customer base, experience and of course – cash.

jason-goldberg-techFab’s European venture received the name Hem (Swedish for “Home”) and now employs 150 employees in Berlin, Helsinki, Warsaw and Stockholm. Some of them are previous Fab employees, some are new hires.

Hem is a designer, manufacturer and retailer and it is an integrated company. It is the technology company that Jason Goldberg wanted to build for a long time.

But most importantly, Hem is something Fab never was: its own company. An unique organization that goes beyond comparing itself to others. It is not the Amazon of Europe or the IKEA of online. It is Hem. It allows its customers to build custom, beautiful furniture and products for the home and it can now deliver on this promise. It seems to be a company that may lack sales and the buzz Fab had but it has something more important: purpose and substance.

It seems that a more mature Jason Goldberg has finally decided to leave marketing and PR aside and focus on building a real company. An unique company that goes beyond buzzwords and solves real problems, in a real environment, where the team is not made of superstars but rather a group of passionate people that put the product ahead of their own egos. And it started with its leader.

I believe Hem has a bright future, unlike Fab. It is built to last, just like its products. I must say that when I set out to write this post, it was going to be yet another bashful take on Fab’s fall. But the more I read about it, the more I found about Jason and his company and the more personal it felt. And a lot of it resonated through this interview he gave at TC Disrupt. A sense of grit and humility echoed through this talk. As an entrepreneur I know what it feels to fail. I too made mistakes and I too delayed laying off people. I too mistook marketing for product and company development. I too believed sky was no limit and failed. So there is a lot of Jason’s actions that I get from being in a similar, yet smaller scale, place.

Yes, Fab is dying and it’s a great thing. Hem now takes its place and it has the potential to be a far better company. In the end this might be not a cautionary tale of entrepreneurship gone bad but a lesson in resilience and willingness to adapt.

Jason Goldberg took some courageous steps into transforming the company he’s built and it will probably pay off in the future. After all, he runs a company that is pretty close to break even, with $120 million in the bank and a large customer base. And now it has a real business model. How hard can it be?

Using the Mobile Revolution for Marketing

We’re reaching that point in the world where technology has evolved to a micro-level. Computers that used to be the size of large walls are now as sleek and light as a stack of papers, and what was once a brick-sized mobile phone has become the size of a small child’s palm. By now, computers are practically mobile phones.

US teens mobile usage. Source: Nielsen

US teens mobile usage. Source: Nielsen

More people in America use and own mobile phones than toothbrushes. Fifty-four percent of these phones are smartphones, and by 2017, there will be over 10 billion mobile devices. As mobile traffic rises, so too does the need for mobile apps. With 90% of Tweets and 40% of Google searches coming from mobile phones, the way to get and spread day is becoming handheld. While two years ago most of this traffic was coming from teens with cell phones (teens increased mobile consumption in 2012 by 256%, with the standard teen sending an average of 3339 texts per month), mobile usage has extended far beyond teens. Most recently, with the continual creation of mobile apps reaching out to various targeted consumers, many companies have begun a new form of marketing for the mobile online shopper.

In fact, four out of five consumers use their smartphones to shop, and the majority claim that shopping from their phones is more enjoyable than shopping in person. No more long lines, parking tickets, unnecessary purchases, or exhausting traffic jams – consumers can buy what they want, when they want, how they want. And it gets shipped straight to their homes. 56% of consumers use their smartphones to search for a store’s location and directions, 51% to look up product information, 59% to do price comparisons on products, 45% to write up product reviews, and 41% to search for coupons. Smartphones make shopping easy and reliable, even more so than shopping in person. With many stores creating apps or green “Buy Now” buttons, shopping no longer requires physical salesmen.

Not only do mobile apps make shopping easy, but it also allows for information about products to be spread more reliably. 78 – 84% of consumers rely on social networks when researching new products. By 2015, it’s predicted that the amount of goods and services consumers purchase through their mobile phones will total roughly $119 billion. Mobile coupon usage is expected to rise to 53.2 million, and retailers say that 67% see a greater value in having their customers use mobile apps to shop rather than shopping in person. Overall, mobile apps bring five times more engagement – both in the product being sold and in the dialogue between targeted consumers.

Ivan Serrano is a web journalist and infographic extraordinaire from Northwest California. He particularly likes to write about the technology world, social media and global business. 

There’s no Place Like 127.0.0.1

When it comes to computers, 127.0.0.1 is the “localhost”. In computer networking the local host is “this computer”. Or home. We have a changing landscape in computer usage (shift to mobile) and we notice the same trend in human behavior. People change places more than before. Decreased cost in transportation and relocation means we can move from one place to another without much hassle.

Our home when we're away

Our home when we’re away

But there is no place like home, right? Well – what is home? Apparently our digital hubs have become our homes when we are on the move. Social networks are now our go-to place when we want to connect with our friends, even when we are away. Photo sharing apps like Instagram or Flickr store our memories and we can access them on the fly whenever we are away.

Even our local shop gets replaced by the increasingly present favorite online shop brand. There is a pattern that shows mobile buyers (those that change residential areas) are more prone to purchasing online and staying loyal to their favorite online store brand:

“For example, customers at Diapers.com who change locations become more or less likely to shop online, depending on the increase or decrease in their offline shopping costs in their new neighborhoods. Specifically, shoppers who have some experience shopping online and then move to a new location with homes with more storage capacity and relatively few stores will increase their online shopping activity.” Source: MIT Sloan Review

We, human beings, do not enjoy change all that much. In a fast moving world – we need stability. We need a fixed point. And after all it is all relative. If we’re constantly on the move – the only fixed point is that which moves with us or is everywhere around. Brick and mortar stores are fixed and therefore always moving for the traveler. Our fixed point is in the cloud. Our fixed point is the mobile.

Tweet to Buy From Amazon. #AmazonCart – a Partnership Between Amazon and Twitter.

amazon-twitter-cartTwitter keeps getting closer to social commerce. The social network just announced a partnership with Amazon where users can add products to their Amazon cart with a tweet.

The process is fairly simple. Amazon customers who are also Twitter users can add products by following three simple steps:

  1. Connect their Amazon and Twitter account
  2. Watch for tweets containing an Amazon link
  3. Reply to above mentioned tweets and adding “#AmazonCart”

After users follow through these steps products are automatically added to their Amazon Cart and they can buy later. If Twitter users didn’t connect the accounts or the service is not yet available in their area, they get an automated message from @MyAmazon guiding them to a specific Amazon web page describing the service:

amazon-twitter-cart-not-working

Most avid users – the Amazon affiliates

tweets-amazoncartAfter quickly connecting my accounts I was expecting to see a public stream of Amazon shoppers announcing their purchases.

Not even close. Right now most of those tweeting the hashtag are Amazon Affiliates asking their followers to reply to tweets containing  their affiliate links.

Apparently this is somewhat of a feature, as Julie Law, Amazon spokeswoman states: We have a significant number of customers who use Twitter, and a significant number of affiliates who use Twitter, too.

Twitter is serious about eCommerce

The #AmazonCart partnership is probably just a first step for the two companies. Amazon is interested in social commerce and as Facebook is probably harder to steer, Twitter seems the right choice.

Twitter on the other hand, showed interest in developing ecommerce abilities by hiring ex Ticketmaster CEO Nathan Hubbard. Moreover, this year information was leaked about a potential partnership with Fancy.com and mobile payments company Stripe, involving a three way solution allowing Twitter to leverage potential customers.

Twitter-commerce is in the Making. And it Looks Great.

It seems that Twitter is moving forward with its plans to enter the ecommerce market. Last year the company hired Nathan Hubbard, former Ticketmaster CEO and ecommerce heavyweight, to handle ecommerce development efforts.

News about Twitter Commerce have now surfaced, showing a potential user flow for customers buying directly from Twitter.

The company has partnered with Fancy.com (online catalogue / Pinterest for buyers) AND Stripe (web and mobile payments) to provide merchants with the option to sell on its social network. The link between Twitter and Fancy is obviously Mr. Jack Dorsey, Twitter (somehow) co-founder and member of the board for Fancy.com.

Twitter commerce user flow found on Fancy.com

Twitter commerce - Source: Re/Code.net

Twitter commerce – Source: Re/Code.net

Re/Code “found” some “documents on fancy.com, in a “unprotected” area. Italics mark some obvious skepticism with “finding the documents” (what- did they just type fancy.com/twitter-commerce?) .

Whereas the documents and their source is of little importance, the fact is the user flow looks great and seems beautifully integrated with Twitter. It even provides a package tracking app and same-day delivery options.

Unlike Twitter, Facebook notoriously killed the much-awaited f-commerce by ignoring the growing ecommerce trend and its own potential opportunities. Much more –  it then decreased organic reach through its platform for non paying customers, thus alienating potential f-commerce merchants.

Now that the playing field is leveled, Twitter may somehow turn out to be a spectacular and unexpected challenger to eBay and Amazon. It does have 645 million potential customers.

Ad-Supported Mac OS? It could have happened.

steve-jobsIt was 1999. Only three years have passed since Steve Jobs returned to Apple. Britney Spears was climbing the charts with “Baby one more time” and engineers at Apple were a few months into launching the Mac OS 9. They would dub it “The Best Internet Operating System Ever”. It was a visionary product and an awesome precursor to today’s Internet-enabled operating systems.

Unlike its direct competitor, Microsoft, Apple had a simpler way of shipping its operating systems. They would either come pre-installed on purchased computers or subjected to a standard $99 upgrade fee.

Steve Jobs thought he can get more users aboard if he somehow reached out to those yet unwilling to pay for the OS. Ken Segall, the man credited with naming the iMac , recalls how this happened, in his book Insanely Simple: The Obsession That Drives Apple’s Success:

“[...] Steve provided some details about how the advertising would work. At systems start-up, the user would see a sixty-second commercial. This ad could be regularly changed via updates from Apple’s servers. Throughout the rest of the OS, ads would appear in places where they had the most relevance. For example, if the print dialogue box indicated that you were running low on printer ink, you might see an ad from Epson with a link to its store – so you could buy some ink right then and there”. 

The consensus was the main ad, the one running at systems start, would be a premium spot for top-knotch companies. Those Steve admired, say BMW and Nike. Once the ad started running , some system functions would be suspended so the user had to see the whole ad.

Apple engineers and staff were psyched about the idea and they loved the fact that such a new interface could let users try the OS and buy it whenever they felt like upgrading. Apple even registered the patent for this, listing Steve Jobs as the main inventor. Fortunately this system never went public and Apple went on to build its success and later on give out the Maverick OS upgrade for free, but that’s a story for another post.

Apple thought about it, Google and Amazon did it.

Apple was not the only company that thought about the ad-supported OS, but it was the first to seriously consider it.

For starters – like most smartphone users you’ve heard about Android. It’s the most popular mobile OS (or at least the most used). It’s free and it helps Google leverage on mobile ads. So much that it Google now takes in about half of all mobile ads revenue.

Google’s other venture into ad-supported OS is Chrome OS / Chromium OS – the web OS that has Google at its center. And Google’s Ads.

Yeah, both Google and Apple thought about an ad-supported OS. The time-frame, however, is pretty important. Apple thought about the ad-supported OS, it nearly implemented it and ditched it. An year later (2000) Google launches AdWords. After yet another 5 years (2005) Google buys Android. 6 more years passed until Google launched its Chromebooks in 2011.

Amazon, the king of online retail, thought this is a great idea also.It started using it on its Kindle readers in 2011. Later on the Kindle Fire was subsidized through ads. The ad-supported device / OS seemed so good that Amazon didn’t actually bothered to built no-ads versions. Or talk about it.

Apple’s “say no” culture lead to dumping the ad-supported Mac OS

Fortunately Apple scraped the idea and later on figured out an way to give the Mac OS for free (it’s doing pretty well selling apps and music). Its focus on delivering a great user experience finally won. It was Probably Steve Jobs who remembered his own words, spoken at the 1997 Apple World Developers Conference:

“Innovation is saying no to a thousand things”

Flipboard Becomes an Ecommerce Gateway with its New Catalogue Feature

flipboard

 

Flipboard, famous for making it easy to read webclips and magazines on mobile devices, flips over to ecommerce. In a recent blog post the team announced it will allow brands and users to create virtual product catalogues.

For starters the company allows users to flip through curated content with v-magazines such as “Modern Man,” “Beauty Bar,” “Home Sweet Home,” “The Pantry” and “The Active-ist”.

Several brands have also taken up the opportunity and have launched brand magazines. The thing is – these magazines allow users to browse through holidays offers and than shop. It’s safe to assume that Flipboard aims at something more than just content browsing.

Right now the company has enlisted Banana Republic, Birchbox, eBay, Etsy, Fab and Levi’s. Soon others will  join given the fact that Flipboard has more than 85 million users (a rather interesting market), with 1 million of them actively creating and curating magazines.

Flipboard closing into Pinterest

Remember when we talked about how Pinterest is killing it in terms of ecommerce referral traffic? It seems that Flipboard has also taken up the model and lets users collect products using this handy-dandy little bookmarklet that allows users to collect and share their favorite products.

A mobile commerce gateway to lovable goods

Flipboard is one of the most popular mobile apps around  and not just in terms of number of users. Its 1 million personalized magazines has led to change in user behavior. Almost 50% of all users now read personalized magazines created by less than 1%. The time stamps are interesting also: most reading is done in the morning (9 AM – kinda like a morning newspaper), magazine updating is done in the afternoon and most sharing is done in the evening.

So far their unpaid editors were not able to make an actual living curating the magazines but who knows – The new commercial magazines might change the way we look at Flipboard.

With over 1 million editors, 85 million users and a lot of nice products out there Flipboard can maybe become the mobile Pinterest. There is a need for socially curated ecommerce stores, Pinterest is a success so far in terms of ecommerce interest and mobile is on the rise. Say hello to the new Ecommerce Gateway.