”Shit, this is a big problem,” Jason Goldberg wrote in a letter to company executives. His unicorn had run away and was heading directly towards a cliff.
But he was no rookie. In fact, he was an accomplished entrepreneur. By 2013, when he sent the letter, his creations included Jobster, Socialmedian, and Fabulis, which eventually became Fab.com.
The e-commerce company was founded in 2011, and in two years, it had raised $336 million dollars. But, by October 2013, they had already spent more than half of it.
Even after spending $200 million dollars, Fab.com had not tested their business model and they did not know exactly what their customers wanted to buy.
Fab.com was a flash sales site that offered items curated by the unique taste of Bradford Shellhammer, Goldberg’s partner. And for a moment, it was successful, reaching a $1 billion valuation. But, it ended up selling for no more than $30 million dollars.
How did this happen?
The Origin
In 2010, Jason Goldberg and Bradford Shellhammer originally created Fabulis as a dating social network for gay men.
Fabulis was a successful idea. It raised $625,000 dollars in funding, from names like the Washington Post.
Fabulis was also exclusive. Until April 23rd, 2010, only other users could invite you. However, even with these conditions, it had 14,000 registered members.
But, the hype did not translate to money. So, the founders turned it from a dating site to an e-commerce company.
After five months, Fab.com reached one million subscribers. By the way, just for comparison, it took Facebook twice as long to reach that milestone.
Fab.com’s idea was simple: Designer’s items in flash sales.
Users would get email notifications of the products on sale and the time left to buy them. There was a chandelier made completely with Martini glasses that cost $1,775, a motorcycle helmet covered in Rhinestones, and a Rooster sculpture made with Fanta labels – just to give you a few examples.
It was Shellhammer who curated the items. He was a genius at creating trends and convincing people to buy them.
But, what was so special?
The Secret Behind Flash Sales
Take Amazon, for example. It’s based on a customer seeking to meet a specific need.
But flash sales create demand by making customers feel the urge to buy.
And then, there was another ingredient: Fab.com’s close integration with social networks. So, you could have free credits from linking accounts, share products with friends, and gain popularity points.
John Furrier, CEO of SiliconANGLE Media, told Forbes that he didn’t like linking social platforms to other services. But he did so with Fab.com.
Why? He couldn’t explain. He just found it irresistible.
Fab.com also lured some big names, like Andreessen Horowitz and Menlo Ventures. Even Hollywood actor, Aston Kutcher dished out money.
But, by 2014, Fab.com looked more like an ordinary pony than a unicorn. You see, their success inspired competition in Europe. So, Goldberg accelerated Fab.com’s European entry.
That’s when German brothers Marc, Oliver, and Alexander Samwer appeared on the scene. They created European clones of American companies such as Pinterest, Zappos, and Amazon. Once they’d make the copies, they offered them for a high price.
Their terms: acquire us, or we go to war. And Fab.com was no exception. So the three brothers created their carbon copy an called it Bamarang. But, Goldberg wasn’t going to back down.
First, he called Bamarang ”bad design,” and the brothers were ”copycats.” Then, he insisted that his customers valued genuine authenticity. He closed with, ”Do something original or don’t do anything at all.”
Who could blame the Samwer brothers? Fab.com boosted its sales from $18 million dollars in their first year to $112 million dollars in the next. Plus, it had 10 million subscribers willing to receive emails and, most importantly, buy stuff.
So to internationalize Fab.com, Goldberg bought three European clone companies. To this day, the amount is undisclosed, but sources estimate it’s between $60 million and $100 million dollars. And that’s when things begin to take a tumble.
It turns out that Fab.com wasn’t ready for such purchases.
Spending Too Much, Too Fast
A former employee revealed that if Fab had opted to go to Europe later, the story would have been different with a more robust business model. Ironically, Goldberg agreed, only later.
To him, a unicorn startup need a sustainable repeatable, and scalable business model, and Fab.com was struggling with precisely that.
The European acquisitions were chaotic. So, Goldberg lost sight and increased the inventory from 1,000 to 11,000 items. This move destroyed an essential part of Fab.com: Selling personalized and unique items.
Initially, users loved Fab.com because the items couldn’t be found elsewhere. But, eventually, you could buy around 90% of those items on Amazon at more affordable prices and shorter waiting times.
But Fab’s products were becoming more mainstream. T-shirts were amongst their bestsellers and while these looked good, they didn’t exactly stand out from the crowd as anything unique.
At this time, Fab was also making significant investments. First, Fab acquired a massive warehouse in New York. And then, it bought two floors in a building overlooking Manhattan, where they installed the headquarters.
Now, remember we mentioned the waiting times? That was a big pain point. At one point, the average was 16 and a half days! But, thanks to inventory management, it went down to 5 and a half. But getting to this point meant more spending.
The kiss of death came in 2013. Fab.com stopped the flash sales, and their core trait was now gone.
No One To Say Stop
Now, you might be wondering: Where was the Board of Directors? Someone had to stop the unicorn from falling into the precipice.
The truth is, nobody paid attention, and the company kept on spending. Fab.com made expensive investments in online marketing and television commercials.
As a result, Goldberg spent a third of his time on internalization. But, still, things weren’t looking up.
So, in early 2013, Goldberg had two alternatives: Either focus only on the U.S. market, with a profitability goal of around $150 million in sales or press for 100% annual growth and global domination, which, is always enticing.
And again, Goldberg has reiterated that Fab.com needed a Board Member to say ”stop” because they still wanted to be in Europe.
Despite having raised about $150 million dollars and a $1 billion valuation in July 2013, the outlook was far from encouraging.
So, we go back to that letter. It was October 2013. He handed the company executives the letter, but also his plan to fix it.
He just needed $300 million dollars to carry it out and the massive ongoing investments. Logically, in no time, he faced terrible news. First, Europe didn’t turn out as expected. Then, a short time later, his co-founder Shellhammer left Fab.com.
Goldberg took action: There were layoffs in Europe and three rounds of personnel reduction in the United States.
Lessons From The Past
”I was too quick to focus on cutting costs and reducing the scope,” he said.
He said that he should have devised a plan with the Board to preserve value for shareholders.
In 2014, Fab.com was spending up to $14 million dollars a month. Loosing money like crazy, Goldberg took the $10 million dollars in inventory and sold it.
He used that money in one final attempt: Hem.com. Similar to Fab, Hem.com sold high end products and household items. And Goldberg had no choice to believe in it, as he took Fab’s remaining funds, around $80 million dollars and went all-in.
But Hem didn’t live up to expectations and performed poorly. So in 2015, Goldberg sold Hem, which still held some of Fab’s DNA, for less than $30 million dollars, one-tenth of its value in 2013.
Even with the downfall of Fab.com and Hem.com, Goldberg continues to make new companies. In 2016, he launched Pepo, a live-messaging message application, and one year later, he created Simple Token, which allowed companies to develop their own cryptocurrencies.
So, he has the right ideas. But in the end, there’s something great that we can take away from Fab.com. And the lessons are there, in plain sight. But sometimes, startups are unable to see them.
