THE TECH 'TITANIC': How red-hot startup Fab raised $330 million and then went bust
On Friday, Oct. 11, 2013, Fab CEO Jason Goldberg gathered a dozen executives in the eighth-floor conference room of the company's New York City headquarters.
When the executives filed in, they were handed a five-page document. Goldberg sat at the head of the table, his expression somber beneath his salt-and-pepper scruff.
He explained that Fab, a company that had been valued at $900 million just three months previously, was about to change drastically. Two-thirds of the company needed to be fired. Its European division would more or less be shuttered. The company had burned $200 million of the $336 million it had raised, and it had failed to find a sustainable business model.
Megan Dickey/Business Insider
"We are going to make this work," Goldberg's five-page missive began. "It has to start with brutal honesty."
Goldberg advised everyone to "acknowledge that we have a serious problem."
"We spent $200M in the past 2 years. $200M!" Goldberg's letter read. "We spent $200M and we have not proven out our business model. We spent $200M and we have not proven that we know precisely what our customers want to buy.
"We are the most heavily funded startup in NYC in our life cycle and we have spent 2/3 of the cash ... Holy shit this is a big deal."
Goldberg's rallying cry could not save Fab.
Later that month the company laid off some employees. Key executives, including Goldberg's cofounder, Bradford Shellhammer, departed.
A year later, rumors swirled that Fab would be acquired by PCH Innovations for a mere $15 million.
This month, that deal is expected to close. PCH Innovations will buy the wreckage of Fab, insiders say, in a deal valued at $15-$50 million based on PCH's stock.
How does a billion-dollar business go bust in three years?
Why didn't Goldberg see this coming? Why did investors keep giving him hundreds of millions of dollars?
Over the past few weeks, we've conducted a dozen interviews with people intimately familiar with Fab's business, and we asked them those very questions. Many wished to remain anonymous, to avoid legal ramifications, but they had a lot to say.
"I don't think everyone who worked for Fab realized what a true Titanic it was," one former Fab employee said.
Here's how the "world's fastest-growing startup" exploded quickly - then crashed.
The beginning: 'from zero to hero in 9 months'
Jason Goldberg, 42, has experienced failure before.
A graduate of Emory and Stanford's MBA program, Goldberg began his career in the White House. He spent six years as a special assistant to the chief of staff under Bill Clinton and later became the marketing director of T-Mobile. Goldberg first entered the startup world in the early 2000s when he founded Jobster, a recruiting platform that raised about $50 million before it went sideways and laid off nearly half its staff.
Goldberg's political and marketing backgrounds make him perfect at selling a vision and rallying others around it. He prides himself on being transparent - although he occasionally tells half-truths to sound more compelling. For example, Goldberg told the media Fab had 14 million registered users in July 2013. Internal sources say Fab's numbers never grew beyond 10 million. One person said Goldberg got to 14 million by "rounding up." Another insider denies the claim and said the 4 million user discrepancy was due to natural attrition and the company cleaning out inactive user Fab accounts.
Others describe Goldberg as a polarizing figure whose behavior 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."
Despite his shortcomings as an operator, Goldberg has founded several businesses. In 2008 he launched Socialmedian, which was later acquired by XING; there, Goldberg served as chief product manager and accumulated personal wealth.
In 2010, Goldberg founded another company with his friend Bradford Shellhammer, his Socialmedian cofounder, Nishith Shah, and Shah's wife, Deepa. They created Fabulis, a social network for the LGBT community that pivoted to become a daily-deals site. Fabulis finished the year with only 150,000 users. They told investors, who poured about $1 million into Fabulis' seed round, that they needed to shut down.
"I'm a big believer in ship it fast, iterate it quickly. But you can't iterate your way to a business model," Goldberg said of Fabulis at a Berlin conference in 2011.
Goldberg and his cofounders spent three weeks building what would become Fab.com, a design-focused e-commerce site. Fab would feature and sell third-party items from small design shops all over the world and use a flash-sales model, which had proved successful for sites like Gilt Groupe and Ruelala.
Flash sales allow e-commerce companies to sell a limited amount of inventory quickly by offering it at a discount for a short time, usually one day. Flash sales enable sites to test inventory demand before they purchase products in bulk.
Goldberg and his team drummed up 45,000 prelaunch signups, then unveiled Fab's website on June 9, 2011. Goldberg invested $500,000 and came up with a clever invite scheme: People could unlock new products and parts of the website if they invited friends to join Fab.
In the beginning, Shellhammer said Fab felt like his personal store. He flew around the world and found funky objects, then put them on the website. Occasionally customers would buy them.Soon, tens of thousands of people were opening Fab's emails to shop for items they couldn't find anywhere else, like a $1,775 chandelier made of martini glasses or a rhinestone-covered motorcycle helmet.
"I was really impressed with the distinctive design and consistent selection of goods," one e-commerce executive said of Fab's launch. "If I showed you a random item and said, 'Do you think that's on Ruelala or One Kings Lane?' You might not be able to tell the difference. But you could always tell which product was a Fab product."
A few weeks after its launch, actor Ashton Kutcher and Silicon Valley investors gave Fab $1 million. Many of Fabulous' initial investors, like First Round Capital and angel investor David Tisch, rolled their money over into the new company.
By October 2011, Fab was generating $100,000 a day. It hired 80 people and grew to 750,000 users. Etsy veteran Beth Ferriera joined Fab as COO and David Lapter joined as CFO. Fab was called the "fastest-growing startup in the world."
The company finished the year with 1.3 million users and an annual run rate of $80 million. It closed a $40 million round of financing at a $200 million valuation from top Silicon Valley investment firm Andreessen Horowitz. Jeff Jordan, who also invested in Pinterest, joined Fab's board.
Fab moved into two floors of office space on in Manhattan's West Village. Goldberg gave a presentation in Berlin called "From 0 To Hero In 9 Months" about how he took a failed startup idea, Fabulis, and made it a success.
That success, it turns out, was fleeting.
"There was a real business there," a former Fab employee laments. "It could have worked."
Another agrees: "People used to rattle off things they bought on Fab to me. We had that [magic] that got people to open emails and engage with content ... There's no question the core business worked. That's the frustrating part about all of it."
The $100 million mistake
Daniel Goodman / Business Insider
Daniel Goodman / Business Insider
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 $105 million at a $500 million valuation. The board approved a plan to rapidly expand Fab's business and reach $100 million in sales by year end.
Fab's early traction was noticed around the world, and within its first six months, four near-identical clones popped up in Germany. A fifth, backed by the Samwer brothers, Bamarang, troubled Goldberg and his board.
Marc and Alex Samwer are German entrepreneurs who have made millions launching near replicas of successful American internet businesses abroad, including eBay, Zappos, Pinterest, and Airbnb.
Bamarang was a pixel-by-pixel clone of Fab. Goldberg and his board decided to move fast and launch in Europe, even though the business was still fledgling in the US.
Most startups wait until they've 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 Bamarang.
Fab acquired three similar European startups that year in all-stock transactions. It bought Casacanda in February 2012, Llustre in June 2012, and True Sparrow Systems in November 2012.
Fab sources estimate that moving into Europe prematurely cost the company $60-$100 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 $12 million warehouse there that eventually closed.
"When you look at Fab's decision to go to Europe, we were still nascent in the US," said one former Fab employee. "We had our ducks in a row, but not everything figured out. We couldn't afford to send anyone from the US there because we were trying to keep our heads above water here. Two years later would have been a more natural place to make those investments in [Europe]."
Back in New York, Fab made another decision that proved detrimental to its core business. It decided to ditch flash sales and start holding inventory.
Pivoting from flash sales
Fab worked with small designers to feature and sell their third-party goods through flash sales; the designers fulfilled orders themselves, which resulted in the slow shipments.
In mid-2012, Fab made an effort to deliver products faster, within 6.5 days. The most obvious time-saver was for Fab to begin holding inventory.
Fab purchased a warehouse, in New Jersey, and by the 2012 holiday season it was moving some of its products. Delivery time dropped to 5.5 days. Fab's customer service improved, too, with the average response time dropping from 48 hours to less than 12.
Fab rapidly scaled the number of products it had on its site. The company jumped from having 1,000 products, or stock keeping units (SKUs), per day in 2011 to 11,000 six months later. Fab launched a number of new product categories, including food and pet items.
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 had product market fit, but Fab didn't understand its product market fit," a former Fab employee said.
Fab's warehouse workers noticed the first signs of trouble during the holiday season of 2012. Fab generated $110 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.
Despite that, in 2013, Fab decided to ditch flash sales completely and sell only the items it kept in stock.
"That was the kiss of death," one former employee said.
Spiraling out of control, and staging a coup
Fab's 2013 kicked off with a five-hour board meeting. The board - which consisted of First Round Capital's Howard Morgan, Fab CEO Jason Goldberg, CTO Nishith Shah, Andreessen Horowitz's Jeff Jordan, Atomico's Geoffrey Prentice, Tencent's James Mitchell, and Sherpa's Allen Morgan - decided Fab needed to move faster. It approved a plan to increase Fab's burn rate to generate $200 million by the end of the year. The plan would drain Fab of its remaining capital by August, but as long as Goldberg was able to raise $300 million more by then, the company would be fine.
"We thought we had this great opportunity," one board member recalled. "We wanted to really go for it. We were foolish perhaps."
Fab's promise was compelling, and Goldberg delivered it flawlessly. There were four e-commerce companies in the world worth more than $10 billion, Goldberg would say. And if you invested in Fab, you had to believe Fab could become the fifth. And that it could become the fifth in the shortest time.
Fab planned to achieve that through "emotional commerce." Its sweet spot was gifts people give to loved ones and the items they put on display in their homes.
"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."
Said another: "It's pretty clear Jason wants to make a personal mark for himself and be the next Jeff Bezos ... If we had just stayed the course, Fab would have been a very profitable business."
Fab increased its spending to $14 million per month, and sales in the first quarter of 2013 increased to $40 million.
Goldberg began fund-raising in the spring but he quickly discovered money was harder to round up than he'd anticipated. He also began to see that Fab had serious issues, caused by growth tactics the company had implemented in 2012. Europe, Goldberg realized, was a disaster. And users who had been acquired through aggressive Facebook-marketing campaigns weren't showing strong repeat buying patterns.
Fab had been paying attention only to top-line sales and user growth. It failed to see how messed up its cost structure had become.
"We had at 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."
Another former staffer said Jason was warned to cut costs sooner, but he ignored them. "There were recommendations from the senior team to say we should cut Europe's operations in half, but Jason was reluctant to do that until Fab was finished with fundraising," that person said.
It wasn't nearly enough. Money had become so tight that Goldberg was prepared to personally float the entire company's payroll in August if the round hadn't closed when it did.
Goldberg told his board how he'd use the $150 million to save Fab. He proposed winding down Europe, chopping Fab's overhead by two-thirds, and restructuring the business around selling higher-margin items like furniture. Shortly after, Fab fired 150 people in Europe.
In October, Goldberg sat his executive team down and handed them the five-page missive about all the mistakes he made as CEO, and he explained Fab's new direction.
Fab's executives weren't sure what to do. Some of them felt Goldberg had run a working company into the ground.
Daniel Goodman / Business Insider
Goldberg's cofounder, Bradford Shellhammer, invited a few Fab executives to his house for a casual dinner. There, sources say, Shellhammer attempted to stage a coup and get Goldberg fired. He suggested writing a letter to the board or creating a presentation to demonstrate all the things that were wrong with Fab. Fab's COO, Beth Ferriera, the group suggested, could take over in the interim. And Fab could go back to its initial working business model, flash sales with third-party designers, and stop trying to be Amazon.
Goldberg learned of Shellhammer's dinner and, shortly after, Shellhammer left Fab. Goldberg gave him a pile of papers that described all the things Shellhammer had done wrong, which included buying $15 million worth of inventory Fab was unable to sell.
When reached for comment, Shellhammer did not deny the coup but said he frequently had Fab executives over for dinner. He said he quit and wasn't fired by Goldberg. Shellhammer has since started a new company, Bezar, that's almost an exact replica of what Fab used to be.
By December, only 150 of Fab's 700 employees remained. Security was hired to standby during a significant round of layoffs in the New York City office, in case employees got emotional.
By mid-2014, Fab was a shell of what it used to be. But Goldberg had a plan to help him and his board save face.
With $80 million left in the bank, Goldberg proposed acquiring a private-label furniture maker in Europe, One Nordic. Fab would be sold off to fund a new e-commerce company, Hem, which would focus on selling original, high-margin home goods.
Furniture accounted for more than 15% of Fab's sales in 2012, and when paired with lighting and other home decor, it accounted for more than 40%. This made the pivot seem obvious to Goldberg.
"While it may seem from the outside that we are struggling to find our way, I have a very clear plan that we are marching towards," Goldberg announced in June 2014 email to some of Fab's designers. "The plan -- which I started to put in place in November of last year -- is to create a timeless design brand, known for our original designs that we bring to market and manufacture."
Goldberg explained that at the end of the month, he'd be splitting Fab into two companies: Fab, which had grown to house 20,000 SKUs on its website, would continue selling "giftables," a new brand Hem would begin selling home items designed specifically for the website. Goldberg guaranteed tens of thousands of dollars in future royalties to some Fab designers who joined him on Hem.
In the fall, Goldberg began exploring acquisition offers for Fab's assets so he could focus fully on Hem. A source said Zulily and Groupon were both contenders. In December 2014, Fab formally changed the legal entity of the company to Hem and later this month, PCH Innovations is expected to buy what's left of Fab in a $15-$50 million stock-based deal.
"You can change a business once or twice, but after that you're drowning," one former Fab employee said.
Goldberg is the first to admit he made a lot of mistakes with Fab.
In his October 2013 missive, Goldberg listed a bunch of his missteps:
- I guided us to go too fast.
- I enabled us to lose our core focus.
- I didn't insist on our honing in on our target customer.
- I didn't build discipline around costs and business metrics enough into our culture.
- I didn't build a retail merchandising/marketing culture.
- I spent too much on marketing before we got the consumer value proposition right.
- I allowed us to over invest in Europe vs. insisting on scaling global teams from the start.
- I didn't build a culture and discipline that connected supply chain to merchandising to delivery. I allowed silos of teams and thinking, and that has seeded an awful an [sic] cancerous distrust.
- I didn't see the need to course correct fast enough.
Now, he has a brighter outlook. He says Hem is doing well, and he firmly believes that in a few years he'll be running a company both he and his investors are proud of.
Goldberg told Business Insider in a written statement:
As founder and CEO I am equally and fully responsible for the good days and the bad days at the Company. We are proud of our accomplishments and we own our mistakes. Our Fab brand is on stable ground today; it is a solid business moving in a positive direction. Our Hem full-stack design brand is off to a fantastic start. The Hem products are unique and innovative, and they are resonating with consumers. Our average order value at Hem is above $1000 and we've sold thousands of units already in our first 100 days -- to customers in more than 40 different countries.
We are more confident today than at any time in the last couple of years that we will create a meaningful and highly valuable business that will deliver a solid return to our investors. My promise to our shareholders is that we will build a business that we are all extremely proud of. We are doing that.
Time will tell the full story.
Let's remember, though, that Goldberg is an eternal optimist. And it will be hard to forget the facts behind Fab's spectacular three-year crash:
- Jobs lost: 500
- Value lost: $875 million
- Money burned: $250 million
For many, the Fab experience was frustrating. For others, it was bittersweet with a lot of hard lessons learned.
"I look at it as a great time in my life. I learned a lot," one Fab employee who was fired recalled. "The only negative is that it ended."
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