I raised more than $300 million in venture capital for Fab.
It didn’t work.
Failure is depressing and sad for everyone involved. As the person responsible for this epic failure, it took me two years and most recently some actual physical and mental distance to be able to talk and write candidly about it.
This post presents the timeline of events of the Fab+Hem journey and begins to touch on lessons learned from my viewpoint. Over the next few weeks I will be authoring follow up posts that go deeper, especially around lessons learned. Along the way, I’ll discuss how those experiences impact the choices I make today as part of a rebounding-and-rebuilding journey.
Thank you in advance for reading.
*(Note to reader: Fab+Hem failed as a venture capital investment. However, the Fab.com and Hem.com brands live on under their respective new owners and I am rooting for them both to be very successful.)
From 2004 to 2013 I authored dozens of blog posts about startups and my experiences with entrepreneurial success and failure. A lot of people read those posts and many told me they appreciated them.
Then, in 2013-2014, Fab imploded. I made some bad decisions during the implosion, including an attempt to rally the troops via a now-infamous “It’s a f-ing startup” post. Humiliated and horrified to have become the story while trying to stay focused on righting the ship, I stepped back and took my blog offline.
Today marks my first real attempt in several years to get back to public writing.
There’s this notion that the venture capital industry celebrates failure. VC is a “hits” business wherein the extreme winners return the fund and make up for all the losses. The entire VC model is dependent on entrepreneurs and investors taking risks, pushing envelopes, testing hypotheses, pivoting, failing, and trying again.
I believe that celebrating failure makes sense to an extent. I agree with the premise of Ron Ashkenas’ distinction between innovation failure and execution failure in his HBR article: When Not To Celebrate Failure.
We should celebrate innovation failure; failure that happens when trying to invent and create.
We should not celebrate execution failure — failure that occurs when teams don’t perform, when companies fail to make the shift from innovation mode to execution mode.
That’s what happened at Fab. An exciting idea spawned an innovative website/app and developed into a hyper growth business, that failed to execute on a sustainable operating model. There is absolutely no reason at all to celebrate the failure that was Fab.
However, execution failure lessons contain their own humbling and informative value to the entrepreneurial community.
Every now and again we see a Medium post about early-stage startup failure but even less common are first-hand accounts of epic execution failures like Fab. That’s why I’m writing this post today and others to follow: to shine a light on some specifics of a large-scale failure so others may learn from the mistakes made and perhaps from my specific experience in trying to recover from it.
Before jumping into it, I want to thank all of the people who participated in the Fab+Hem journey.
Healing from such an experience is very hard and it will undoubtedly take time and considerable effort. It’s also quite possible that some scars may never fully heal. Startups are amongst the most emotional and gut-wrenching experiences that people can go through. In the trenches of a startup, it’s impossible to decouple business and personal; that goes for founders, employees, and investors. Mix in hundreds of millions of dollars, numerous acquisitions with legacy strategies in play across multiple geographies, and the lack of aligned execution creates an even more combustible situation.
Our employees gave their everything to the company. They made it their lives. I hope that every one of them learned from and benefited from their experience, and that they view their Fab experience in totality and not just by how it ended. It gives me immense pride that more than 15 new startups have been founded by former Fab+Hem employees. Hundreds more Fab alumni have gone on to experience personal and professional growth at employers of all sizes. I wish them all great success.
Our investors gave us their money and their trust. Some of them invested their own personal money. Many of them invested on behalf of individuals and institutions that they represent. It pains me that Fab+Hem was unable to deliver. I know that many of them are still managing the aftermath.
I have said, “I’m sorry,” so many times at this point, both privately and publicly, and I am prepared to say it for as long people who have been injured or hurt in part by my decisions need to hear it. I’m sorry.
Between 2007 and 2014 more than $1.35 billion was invested into online “flash sales” companies in the U.S.
Flash sales typically involved pushing customers daily deals on merchandise via email and in-app notifications.
The theory behind the flash sales model was that as opposed to Amazon-style intent-based e-commerce wherein the customer searches to fulfill a specific need, flash-sales would create demand by pushing shopping ideas to customers, analogous perhaps to television home shopping channels, which generate around $6 billion per year in sales vs Walmart’s $480 billion.
The top 7 most heavily funded flash sales companies were :
Of those companies:
0 are still operating independently today.
2 sold for more money than raised (Zulily & Haute Look)
5 completely failed as venture capital investments.
If a VC had invested the same amount into the Series A rounds of all 7 of the companies, she would have made a positive return on her investments simply from the Zulily IPO.
In mid 2011, out of the ashes of a failed social network, Fab burst on the scene and suddenly was the fastest growing and most buzzed-about e-commerce company. Thirty months later, by the end of 2013, Fab was spiraling downwards and then ultimately was sold for a fraction of the capital raised. How did Fab — the 2nd most heavily funded flash sales company — fail as a venture investment? Was it avoidable?
My next blog post will focus on the top lessons I learned from navigating Fab to epic highs and lows. To set the table, below I present the broad strokes of the history and some of the major lesson themes.
In 2012 — Fab’s first full calendar year as a flash sales website — Fab sold $112 million of merchandise, up from $18M in 2011. More than 10 million people signed up for our daily emails. We were kings!
But we were not.
Confident (but in hindsight misguided) that we had built a scalable model that could achieve global-domination — we expanded via multiple acquisitions to Europe and we raised $100M in financing at a $500M valuation.
We broke one of the cardinal rules of venture capital: “Only raise a boatload of cash after you have figured out product-market fit.” We had figured out hyper-growth, but not yet fully settled into a highly functional execution model. We had not yet successfully made the jump from innovation to execution.
This distinction is important to draw out as a lesson to the current unicorns and their investors; long before you have achieved unicorn status you better have a sustainable, repeatable, scalable business model and be operating at peak efficiency. That might sound like common sense, but you’d be surprised how many unicorns these days are still figuring it out.
Fab was not Uber. We did not have a highly scalable operating plan and playbook that could be replicated from market to market. Our model was highly people, inventory and warehouse intensive. We had no business going overseas before we had figured it out at home. Had we instead forced Fab to get profitable in the U.S. before expanding overseas, the rest of the Fab story would have turned out very differently and quite possibly very positively.
At the end of 2012, 18-month old Fab was already flying close to the sun. We had missed our 2012 plan for $140M in merchandise sales (imagine growing from $18M to $112M and that being a big miss vs. your plan!). We had made costly investments in online marketing, television advertisements, international expansion (30% of our cash-flow already and 1/3 of my time), and warehousing. We would need a huge capital infusion in 2013 to continue growing.
In early 2013 our board considered two possible paths:
(A) Hunker down, retrench and focus on the U.S. market only, and target profitability around $150M in sales, or
(B) continue pushing for 100% year/year growth and world domination. To be fair, it wasn’t much of a debate.
Only one board member argued for path A, while everyone else, including myself, pushed for the rocket ship. (Another note to aspiring unicorns and their investors: You know the really annoying board member who is constantly yelling “stop!” while everyone else is cheering “go!” — Rather than secretly wishing you could remove them from your board, focus instead on listening to them more!).
We put up huge Q1 sales numbers in 2013 and then we hit a wall.
While out trying to raise $300M in financing to fully-fund our existing investments — including inventory and warehouses on two continents — we scaled back on marketing to preserve cash and sales fell dramatically.
In June 2013 we raised $150M at a $900M valuation (later marked down to $800M pre-money), which should have been a huge success for a 2 year old brand. But, the reality was that we had failed at our financing: we needed $300M to pursue the plan-of-record and support the large investments that were already underway. In June 2013 Fab was a newly minted “unicorn” that was on a perilous path. I remember fielding phone call after phone call congratulating me on the unicorn status and just being sick to my stomach. Not many people know what it’s like to raise $150M at a $900M valuation and know that you’re sailing right into a shit-storm. It sucks.
Shortly after the “unicorn” round, I tried to raise the additional $150M we needed, but could not.
I then took steps to course correct and get the burn rate under control with a single massive layoff in Europe and three rounds of reductions in the U.S., taking Fab North America from 400 people to around 85 by the end of 2013. We slashed marketing spend. We tried to simplify the business and we narrowed the merchandise scope. Truth be told, it became a death-spiral. The only thing we became good at was reducing the burn rate, but the business itself was floundering and losing value.
Looking back, this is the period in the story that I regret the most. I slammed on the brakes of a speeding rocket-ship and that’s incredibly hard to do, and I failed miserably at it. I was too quick to focus on slashing costs and narrowing scope vs. taking a step back and devising a plan with our board to preserve value for our shareholders. Everyone always says: “Cut fast and cut deep.” I now disagree. It should rather be: “Cut smart, cut with a plan, and cut with help.” I got too far out ahead of our board on the cuts and didn’t ask for enough help from them. I didn’t involve our executive team well in the decisions. I unceremoniously laid off some of my most loyal colleagues. I broke up with my best friend and co-founder — putting aside that the core spirit and culture and purpose of the company was always designed as a blend of the two of us — while I should have figured out a way to make him part of the solution.
No one will ever know what might have been for Fab if I had handled this period differently, but I certainly do wish now that I had taken it slower and involved more of the good smart people around me in the process.
In mid-2014, with sales plummeting, the company still losing money and saddled with $10M of low-margin 3rd party inventory, I decided to sell the Fab brand and focus our remaining resources on our emerging private label business, Hem.com. The unicorn was far behind us; Hem was a last-ditch effort to create some value out of the best remaining company investments.
We sold Fab to PCH International in early 2015. I moved to Berlin, Germany to build Hem; closer to our full-stack design and manufacturing teams. Hem got off to a nice start; the products were beautiful and the margins were very good, but it was a far cry from the rocket-ship growth story our original Fab investors had invested into. By end of 2015 we needed $7M in additional financing to get Hem profitable at around $25M in annual sales.
While confidentiality agreements preclude me from sharing any details surrounding the acquisitions of Fab and Hem, I can tell you that as of today, not one of our investors has made even their initial investment back.
Hundreds of jobs were created and lost within a 6 year period.
There’s no easy way to deal with public failure. There’s no business school case study or a16z podcast or Shark Tank episode on post-failed-startup-recovery. When your startup fails you don’t get automatic lifetime enrollment into the Founders’ Recovery Institute.
Failure sucks. Epic failure sucks more.
It’s lonely. When you fail on an epic level, suddenly everyone hates you. Your employees hate you. Your investors hate you. The press skewers you. The industry shuns you. The same “cool” startup people who used to bro-text you snarky emojis don’t anymore.
That’s life. You earned it. Deal with it.
I’ve had some success in my career and most recently some big-time failure. News flash: Success is sooooo much better than failure. (Sophie Tucker said it better.)
Some of the best advice I’ve seen recently on public failure was from Jeff Bezos, who said: “If you’re doing anything interesting in the world, you’re going to have critics,” he said. “If you can’t tolerate critics, don’t do anything new or interesting.” (video below).
Jeff was talking about handling public criticism (which goes hand-in-hand with public failure), but I think his advice applies equally well to handling all sorts of public failure.
So, you’ve failed, what do you do next?
Every founder should go through a soul-searching exercise after failure. They should ask themselves a series of questions along the lines of:
One of the things that I did shortly after acknowledging that Fab failed, was to imagine myself a founding CEO “report card:”
I discussed my self-assessment with several people with whom I had worked: co-founders, board members, team members, coach, investors, my husband — to make sure I wasn’t missing anything as I embarked on this path to personal growth.
Collective feedback: I was well-suited to be a startup founding CEO, but that in order to avoid future failure, I would need to either commit to learning how to scale operations more professionally and/or empower others to do it for me. I acknowledged that I’m really good at launching a company, less good at operating one. I would need to either dramatically improve on my weaknesses in the years ahead, or double down on my strengths while handing the keys to others to generate scale. Making that decision alone — which it would be — was half the battle.
My biggest advice for those on the rebound is: Hone in on something that you are really, really, good at, and get back to basics doing that. Prove to yourself and to others that you still have mad skills that can have a positive impact, whether inside of an established company, at another startup, writing a book, teaching, volunteering, and so on. Just find one thing after your failure that reminds you that you are still very good at something valuable.
At the same time, be more cognizant of your weaknesses than ever before. Left unaddressed, you will likely repeat the same mistakes again.
And, hunker down and get out of the spotlight for a bit.
In the Fab+Hem journey, I am fortunate that there was the Hem year of the story. In 2015 I escaped the Fab spotlight and the U.S. startup scene and hunkered down in Berlin, Germany and by all accounts built a lovely brand, Hem. The Hem year allowed me to begin recovering from Fab while still trying to salvage some value for our investors.
Ultimately though the weight of Fab proved too heavy for Hem. Hem inherited the complex Fab capital structure (more than 100 shareholders across 5 investment rounds at steep valuations), the complex Fab business structure (15+ subsidiaries around the world), and mountains of Fab debts and liabilities. Imagine trying to explain to your founding team that 90% of the company’s equity was already allocated pre-launch, that there was a $300M+ liquidation preference, and that under every rock and around every turn was more money owed for some random old expense from the previous company that everyone had forgotten about. It was difficult, to say the least.
Hem was a good company setup the entirely wrong way.
Founder alignment was off. Investor alignment was off.
One of my biggest realizations towards the end of Hem was that while I took great pride in building something visibly “good” at Hem, it was still mired in the overhang of Fab.
I loved what we were building with Hem though, and over the Christmas-New Years holidays at the end of 2015, while visiting Australia, I had to make an important decision as to whether I would personally invest in continuing Hem along with an investor group who was considering a takeover, or whether I would leave the company and start anew.
While walking around one day on our holiday, my husband Chris forced me to answer the most important question: “Jason, if you put all emotion of the past years of Fab-Hem aside,” he asked, “if you could spend the next couple of years building anything — and investing our own money into it — would it be Hem, or would it be something else?”
It took me less than 2 seconds to answer “something else.” The path forward for Hem under the new investor would not be focusing on my sweet spot: Technology. I was the wrong guy to be investing in it and leading it. Plus, there had been an idea nagging at me for a couple of years — a passion project — that I had kept putting off working on. Now was the right time to get going on it.
On February 2, 2016 at 4pm, Just hours after we signed the final documents to sell Hem, I boarded a plane to Pune, India, where the best engineering team in the world resides, and where I’ve been living temporarily ever since.
I’m ready to dust myself off and to come back and try again, this time with a fresh company and a fresh idea: Pepo.
Joining me at Pepo are Sunil Khedar (Co-Founder/CTO) and a team consisting of many of our top engineers and product managers from Hem, Fab, and Social Median. Sunil and I began working together in 2008 and our Pepo team of 20 has a combined 100 years of experience working together on large-scale internet projects. (another way of saying that the average Pepo team member has been working with Sunil and me for 5 years now building products that have been used by millions of people).
I am currently self-funding Pepo and other from saying that we will be introducing it later this year I’m not ready to talk about it in any detail yet.
What I can tell you — assure you — is that I’m hard at work right now doing what I love most: building a product from scratch and planning a launch strategy. I want to recreate the magic without the failure.
If you made it this far, thanks for reading this very long post.
I hope that some people find it valuable.
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