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?

Tesco profits drop 92% yet online sales increase

Tesco-LogoIn what is probably the biggest financial error in commerce this year, Tesco announced that it overstated its profits. By a lot. The problem was caused by the company booking payments from suppliers as income. In fact, payments were used by the company to run promotions on the suppliers’ behalf.

Tesco is now under fire as forensic accounting investigators from Deloitte reported the company overstated profits expectations by £263m in the first half of 2014.

Not only that but profits overall are 92% down after a previous write down of £527m caused by the above mentioned error in registering income in previous years.

Nevertheless, Tesco is still the largest supermarket in the UK, leading the pack with a large market share:

tesco

Although its market shares have taken a hit, it seems that online sales are growing at 11% and I believe this is just the beginning. Following the unfortunate news eight executives were forced to leave the company, including chairman Sir Richard Broadbent.

Now the company is ready for a fresh start. Ok, scratch that “fresh”. It’s more like it’s forced to improve its omnichannel approach as customers demand better service and improved shopping experience. The company had previously employed several experienced directors to help it become a competitor to Amazon in global retailing. How well this would fare is hard to tell but they should get some award for trying. After all Tesco was the first to ship an online order.

 

 

The Fascinating World of Amazon Logistics

Jeff Bezos
Jeff Bezos

Word’s out that Amazon is planning on opening its first brick and mortar shop. With such news the retail world is now buzzing with questions:

Is Amazon really going head to head with mainly brick-and-mortar retailers? Should the likes of Walmart be paying attention to such tactics? Could this mean a new way of doing business for Amazon?

The answer is no.

First of all Amazon is not opening actual stores. It’s opening pop-up stores. The big difference is pop-up stores are available for just a limited amount of time. They pop-up and then they pop-off. For example the two stores Amazon is now opening will be in San Francisco and Sacramento and will be open just for the holidays.

Amazon will use these stores to showcase its proprietary mobile devices (tablets, ebook readers, the smartphone). Once the holidays are over – puff – they disappear.

There is, however, one report from the Wall Street Journal, not yet confirmed by Amazon, saying the company would actually be looking for more. This report points to a New York location in Midtown Manhattan that would serve as a permanent physical presence. Again, this won’t be your typical store but rather a location designed to respond to specific Amazon needs.

Such needs would include testing Amazon products, order pick-up, returns and local delivery. Maybe even a drone helipad. Who knows?

Seriously now – with the store working as a mini-warehouse, the company could easily offer same-day delivery to near-by customers. That’s a great way to compete with Google’s same day delivery. These type of operations (pop-up shops and drop-shops) could become mainstream in the future as retailers need to bridge the gap in omnichannel retail AND provide faster shipping.

However, Amazon’s offline presence should be scanned from a different perspective:

Amazon is not moving offline. It is already there.

There are no Amazon stores just yet. Except for a few Amazon lockers and the occasional pop-up stores, the largest online retailer remains a pretty digital presence.

Except for its logistics.

Beneath the magic of Amazon’s online retail presence lays an well-oiled logistics machine. Amazon combines advanced IT systems, human operations, robots, huge warehouses and a complex shipping operation to fulfill its daily orders. And some underpaid workers but that’s another thing.

Inside one of Amazon's Warehouses. Source: Wired
Inside one of Amazon’s Warehouses. Source: Wired

How many products does Amazon ship? Billions.

In 2012 Amazon sold and shipped more than 10 million products each day. The total number of products shipped in the last quarter of 2012 was 1.05 billion. Yes, that is a Billion with a B and it is reportedly the first time in the company’s history when it sold more than 1 billion products in just one quarter.

The number of listed products is also huge. Its top 5 markets all list more than 100 million products, with the US totaling a whooping 253 millions, as reported by Export-X:

The total number of products listed on Amazon's top markets. See more here.
The total number of products listed on Amazon’s top markets. See more here.

Amazon Fulfillment: 83 million square feet of storage and fulfillment centers

You’ve probably guessed that shipping 1 billion products per quarter to more than 200 million customers worldwide requires a bit of work. What you probably don’t know is that such a large-scale operation uses 50 million square feet of storage in the US and 33 million square feet of storage outside US (source).

There is no other ecommerce competitor with such storage and fulfillment potential. Its dominant position allowed for two interesting business models to evolve: The Amazon Marketplace and Fulfillment by Amazon.

To reach sales as those shown above, Amazon lists and sells both its own products and those from 3P (Third Party) merchants. Merchants can join its Fulfillment By Amazon program, ship the product to Amazon’s Fulfillment centers and than leverage Amazon’s Logistics.

This means the company can count on its sales AND influence to shape the future of retail. Its logistics are probably the most useful and under rated tool in expanding globally. While everyone wonders if Amazon will set foot in the offline world, the company has already laid the foundations to what will probably be the future of retail.

Of course, the numbers listed above can only show a small bit of what is required to keep Amazon moving and growing. The operational tools Amazon employs and the processes behind this amazing machine will be uncovered in an upcoming ebook. Until then – check out “Understanding Omnichannel Retail” – a comprehensive report on how online and offline sales are now connecting.

Ebay and PayPal Splitting. Why is This a Good Thing?

Ebay and PayPal have been together since 2002, when Ebay decided to acquire PayPal for $1.5 billion. At that moment both companies were heavy weights in their respective fields and growth was booming. Ebay struggled with a previous solution, called Billpoint, until deciding to give in and purchase PayPal.

eBay-and-PayPalSince then, both gained a lot from the other. Ebay benefited from PayPal’s ease of use and helped its customers send money to one another. This helped streamline and secure the purchase process, thus increasing transactions. PayPal, one the other hand, piggy backed on Ebay’s massive user base and international exposure. Its revenue increased by the year and in the second quarter of 2014, it amounted to 45% of Ebay Inc’s total revenue.

The fast growth of PayPal, as well the whole “payments revolution” potential lead Carl Icahn to propose a split between Ebay and PayPal this year. Icahn’s proposal / attack was then fended off by Ebay CEO John Donahoe and PayPal ex-leader David Marcus. Since february 2014, a lot of things happened. David Marcus left the company to join Facebook and biggest of the biggest, tech mammoth Apple launched the Apple Pay. What seemed like a closed case soon turned into a huge split between the companies.

Now – John Donahoe will still run Ebay Inc until the split is official. As of that moment he will step down as CEO and Ebay will be lead by Devin Wenig, now president of eBay Marketplaces. PayPal will split into a new company, directed by Dan Schulman, now president at American Express, Enterprise Growth Group.

PayPal benefits from Ebay Inc. spliting. The split means that PayPal will be able to roam free, grow and develop independently. On the other hand Ebay will be able to … well … do everything it was doing before. The marketplace division is not gaining much from the split. It loses a revenue stream, its shares will drop and it will have to find a new way to keep up with its growth in the future.

However PayPal needs independence to keep up with increasing competition in the omnichannel payments landscape. It needs to innovate, it has to connect online and offline and it has to do a bit better on mobile devices. The split will help the company evolve and here are three reasons why:

1. PayPal can mean more than just payments

Banking as we know is shifting from an old, rigid system to a new way of doing business. That means more than wiring money. It means deposits, it means financing, it means Peer 2 Peer Lending and more. Under Ebay, PayPal was bound to stick to payments and money transfers. Now that Ebay is no longer the umbrella that fosters PayPal innovation, we may soon see more financial goodies from PayPal.

2. PayPal should be more than an accessory to Ebay

Elon Musk explained best why Ebay should not hold PayPal back: “It doesn’t make sense that a global payment system is a subsidiary of an auction website… It’s as if Target owned Visa or something”.

The fact is PayPal outgrows Ebay. It can and should be a global financial company, a field that’s obviously larger than Ebay’s marketplaces can ever be.

3. PayPal could grow even faster as a separately traded company

It’s no secret that Ebay has already done what it could to help PayPal. Now it’s just living off PayPal’s growth. As a separately traded company PayPal can become a larger company, more attractive to investors, which in turn can help the company finance its expansion, growth and fight against Apple, Google, Amazon and even AliBaba.

But …

Carl Icahn is known as a corporate raider and maybe there’s more to this story than meets the eye. There is a possibility that he and others are just splitting the company to later organize a take over from companies such as Visa, MasterCard or one of the larger banks. What could be a profitable short-term strategy could hurt PayPal in the long run and kill one of the most promising financial companies in the world.