Fab.com has been on my mind the last few weeks as I wanted to have an indepth look at the company after I wrote about the refocus in May 2013. I don’t know whether I got bitten by all the hype but the fab.com story is beginning to feel like never ending story. At the momment the fab’s story goes like this:

Raise funding – Unveil a new feature – do Press ->  lay-off staff  – do press on the future of the company and then restart the process.

Pre-face

Fab.com is a business that started as a gay social network. Went nowhere and then pivoted to a flash sales business. Many iterations later and $300 plus million raised fab.com is now in a critical phase of its lifecycle. Why? The fact that they have raised hundreds of millions of dollars from investors (like Andreessen Horowitz) and for all intensive purposes have not a lot to show for it. Thus it will make raising money in future more difficult. What happened to all the raised money?

Acquisitions

Fab.com has been in my own opinion way too aggressive regarding acquisitions. They have acquired competitors in Europe over concerns that a investment accelerator called Rocket Internet may hinder their growth in Europe.  The businesses they acquired:

January 2012 – FashionStake (US)
February 2012 – Casacanda (Germany)
June 2012 – Llustre (UK)
November 2012 – True Sparrow (India)
May 2013 – MassivKonzept  (Germany)

Where have they raised money from?

  • A Grade Investment
  • Andreessen Horowitz
  • Atomico
  • Baroda Ventures
  • Docomo Capital
  • First Round Capital
  • ITOCHU
  • Mayfield Fund
  • Menlo Ventures
  • Pinnacle Ventures
  • ru-Net Technology Partners
  • SoftTech VC
  • SingTel Innov8
  • SV Angel
  • Tencent
  • Thrive Capital
  • The Washington Post Company
  • Zelkova Ventures

Angel investments / Individual Investors

  • Jon Anderson
  • Don Baer
  • Troy Carter
  • Jason Goldberg
  • Lars Hinrichs
  • Mark Kingdon
  • Ashton Kutcher
  • Ben Ling
  • Allen Morgan
  • Dave Morgan
  • Guy Ossuary
  • Kevin Rose
  • Eric Semler
  • Dave Tisch

If you look at the above list of investors you will notice a few things – one they have a variety of investors from across the globe (China, Singapore and India).

Andreessen Horowitz, Tencent stand out for me. Andreessen Horowitz is arguably one of the most important venture capital businesses around. They have an all star team (Marc Andreessen, Horowitz and Jeff Jordan all have serious investment clout). The fact that they have led 2 rounds of investment is interesting. From the outside it looks like Andreessen Horowitz is a very large share holder in fab.com.

Tencent is also an interesting investor. Why? Tencent is a colossus that is a massive Internet business in China. Tencent has also started to slowly investing in businesses outside of China. They have invested $2 billion in a variety of businesses which includes fab.com. The Tencent investment can be seen as a future indicator of where fab.com wants to enter markets – Asia.

Flash Sales is not the problem  – breakneck growth is
I read with interest a Jason Del Ray piece on AllThingsD which mentioned that Flash sales is the problem that led Fab.com having to downsize. That in itself is untrue – are you then telling me that Vente-Privee, Gilt (which has in the last 18 months moved to full price retail), One Kings Lane, Hautelook, Zulily, Markafoni and others are also then in danger of going the fab.com route?

I contest that idea as these other businesses are growing organically into massive commerce businesses. Zulliy is going to IPO soon which makes my argument easier as they have had to grow at a rate that would not scare investors. They did raise $137 million in funding but did not blow through the investment. The other businesses with the exception of the Gilt Groupe are all quietly becoming powerhouses in their markets.

If you look at the flash sales business in its most primitive form – it is reliant on 4 things. A massive database of users that will receive email everyday. Suppliers of merchandise that will be sold to those users. Lastly – a business decision needs to be made regarding whether the inventory will be kept in a warehouse on consignment or whether those suppliers will be selling the merchandise to the business. Staff is also needed to engage with customers and suppliers.

So your capital investment is going to be spent on: User acquisition (which is expensive), partner acquisition to enable sales to make profit.  A flash sales business needs both users and suppliers – the network effect can’t take place without either being missing.

Fab.com not fab?

Hindsight is a beautiful thing but I think fab.com made a few strategic mistakes.

They grew in an unsustainable manner.  There is no way that a business that is less than 3 years old have gone through $300 million. (I don’t have access to fab’s finances but cannot see them with more that $100 million in the bank). The growth via acquisitions and staff count was always going to lead to this predicament.

I am increasingly thinking that fab.com has also made a strategic blunder by being a design orientated business. Why has no one else tried to take on IKEA? IKEA is a mega retailer yet no-one until fab.com existence when into the vertical. Why? I think there are little fixed costs as your design partners are going to ask a premium for their goods. Margins are tight in businesses like this as you are selling aspirational goods that can sometimes be bought by users directly from the designers.

Fab.com’s email unsubscription idea was counter intuitive. Your users are your money making element so if you unsubscribe them from email then you are making your opportunities for a sale a lot smaller. If the users does not want the email – he / she will unsubscribe. Doing it for the users will hurt your bottom line as your driving away the much needed engagement to make a sale.

A few closing thoughts

Fab.com is a business that needs to consider what it wants to be and stick with it. The constant redesign and new features are in the long term going to hurt user behavior. Think about it – every 6 months users have to relearn the fab.com website. If I look at the successful businesses (Amazon, Alibaba etc) – they do not ever change their user interface dramatically. It is done quietly and without the need to concern users with relearning their website functionality.

I also hope that the team at fab.com realizes that their constant reference to becoming an Amazon, eBay or Alibaba is for the informed commerce executive a state of irritable repetition. Those businesses are significantly older than fab.com, have anything from multiples of 20  to 200 percent more users and are quietly doing their business.

I can see fab.com being a $250 million per annum business, being a market leader in their vertical but that is where the discussion ends at the moment. If they execute in Asia then i am willing to relook at their size but at the moment feel that there is way too much PR from fab.com.