How once high-flying Fab’s sale for parts is both worse and not as bad as it seem

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Oh how the mighty have fallen.

Just 17 months ago, investors were strapping Fab with a $ 1 billion valuation and talking about it as the next Amazon. Today, we get news that the company is in talks to sell to PCH International for a whiplash-inducing $ 15 million, according to TechCrunch – roughly the banking fee on the company’s most recent funding round. Ouch.

So what went wrong and is this fall in value as bad as it seems? The short answers are everything, and yes (sort of).

Fab is a case study in unsustainable growth. Like so many ecommerce companies of its generation, Fab was addicted to chasing top-line growth at the expense of profitability (or anything resembling healthy unit economics). Sure, at its peak Fab was generating several hundred million dollars in sales, but it was reportedly losing in the range of $ 90 million dollars per year doing so. It’s as if management and the most recent investors refused to admit that every dollar of growth they acquired, actually cost them more than a dollar in losses.

At the root of Fab’s profitability issues were the anemic margins of selling third-party products, the inability to retain expensive to acquire customers long-term due to an undifferentiated product selection, and an overly ambitious global expansion plan driven by fear of copycat competition. Add to that list founder and CEO Jason Goldberg’s singular-minded competitiveness and insistence on building an Amazon-scale business. All of which was further undone by the loss of Goldberg’s co-founder and Fab’s curatorial secret weapon, Chief Creative Officer Bradford Shellhammer.

But despite all of the above, Fab’s apparently imminent sale isn’t quite as bad as it seems. That’s because Goldberg and his board shifted their focus to a separate brand, Hem, created to manufacture and sell Ikea-style furniture online, effectively orphaning the Fab brand and business in the process. Hem received most of the remaining money injected into Fab during the company’s most recent $ 150 million round, as well as much of its international talent – the company fired nearly all US employees earlier this year.

So what, if anything, would PCH be acquiring for that $ 15 million? The short answer is a brand, some Web traffic, and a bunch of mobile app installs as well as, maybe, some remaining Fab inventory. PCH already owns and operates Shoplocket.com, a site it uses to sell the hardware products it helps its clients manufacture. Presumably, it’s interested in Fab to extend that business to a larger audience.

Make no mistake about it, the valuation assigned to the Fab business less than 18 months ago was among the biggest whiffs we’ve ever seen in the private markets. The spectacular and rapid fall of the business is nothing short of unprecedented, leaving a nuclear crater in its wake. But this $ 15 million isn’t the totality of the return these investors hope to see.

While it’s highly unlikely that Hem will reach Fab’s once lofty valuation – few companies ever do – it’s entirely possible that it can build a big enough business to return more if not all of the $ 336 million that was invested into Fab during its three short years in business. And with the company’s later rounds surely carrying heavy liquidation preference and likely some form of downside protection, those late-stage investors may actually be made whole with a modest Hem success – which, to be clear, is still anything but guaranteed. But Fab’s early investors, those who made the riskiest bets on the company and whom Goldberg forbade from exiting along the way, will be likely to get pennies on the dollar back for their trouble. There’s the rub.

The last piece to this convoluted puzzle is the question of whether it makes sense for PCH, or anyone, to acquire the Fab brand at all. Sure the domain likely still receives meaningful traffic, but the history of consumer Internet turnarounds is not a pretty one. As we’ve written before, it’s often better to start fresh with a new brand online, rather than attempt to resuscitate a damaged one. See MySpace and Digg for just two examples of this reality.

There’s also the issue of Fab’s ongoing trademark lawsuit with JustFab over confusion in the market resulting from the companies increasing overlap in product offerings. Depending on what PCH is looking to sell on Fab – it’s a hardware company so it’s unlikely that it’s planning on selling women’s’ shoes and apparel – this could be an ongoing issue or it could just fade away.

So, in summary, the Fab we all remember, a highly curated online storefront with more traffic than the 405 has been totaled, and is now being sold off for parts. To torture this analogy further, any passengers that survived the wreck, as well as much of the fuel remaining in the tanks have been siphoned off into another vehicle, which is in the early laps of a similar race in Europe. Investors won’t see much, if any upside on this deal, and what they do get will take another several years to present itself. And those parts, which are being salvaged domestically, could end up being little more than an expensive experiment in junkyard shopping.

Welcome to the ugly side of a startup drag race. Sure they were moving fast, but without any steering and no brakes to speak of, this one looked destined to wreck from the beginning.

PandoDaily

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