cat_shoesFor months we’ve been hearing reports of ShoeDazzle shopping itself. Across dozens of conversations with investors, founders, bankers, and other people in the know, we’ve heard everything from “the investors want out” to “the company is simply testing the waters before it raises another round of capital.” We’ve heard about a wide range of potential suitors too.

A deal doesn’t seem imminent according to our sources, and may take the form of a strategic investment instead. But this much is true: now that Brian Lee has stopped the bleeding, everyone is trying to figure out what kind of future the once-scorching fast fashion shoe etailer has. Both the LA ecosystem and the subscription commerce industry that got its early proof points from ShoeDazzle are watching closely.

Several strategic acquirers including Aldo Shoes and Home Shopping Network (HSN) have indicated their interest in acquiring ShoeDazzle, our sources say. The biggest advantage from this type of deal would be the additional infrastructure and scale provided by a large strategic. An established legacy retailer could directly address several of the biggest obstacles to a younger company like ShoeDazzle, including costs related to customer acquisition, fulfillment, and merchandise returns. On the downside, there are culture and integration concerns to consider.

We also heard of a wild-card private equity rollup proposal involving ShoeDazzle, at least two other domestic and international companies in the space, and $150 million or so to make it all happen. With ShoeDazzle being the most established company in this rumored deal and itself being on shaky ground, the notion of integrating additional teams, brands, markets, and so on was apparently too much to make this one doable and this option has apparently been shelved.

The remaining option is an acquisition by another ecommerce player, most likely JustFab. We’ve heard that similar talks between the two companies have occurred on multiple occasions in the past, and now the timing could finally be right. Even though the two subscription shoe companies are crosstown rivals with a healthy distaste for one another, a deal makes the most sense out of all possible transactions. Not only is JustFab healthy enough and well enough capitalized to complete the deal – it crossed a $100 million revenue run rate late last year and raised a whopping $76 million in July – but it would presumably be the only deal that would give Lee the freedom to exit and focus full time on his other startup, The Honest Company. Lee, however, denies that running both companies is unsustainable.

The combined JustFab+ShoeDazzle would likely see a significant reduction in its customer acquisition costs. There would also be savings in terms of reducing duplicate overhead and through increased order volumes. Whether JustFab would keep the ShoeDazzle brand alive and target different demographics, or absorb the brand and members is less clear. Our sources say that if a deal between JustFab and ShoeDazzle is going to happen, expect it to close in the next 60 to 90 days.

Negotiations – and we use that term loosely – have been taking place at valuations between $50 million to $100 million, according to some sources, while others put the numbers higher. The range could vary significantly depending on the nature of the acquirer and the structure of the eventual transaction. Either way, it’s likely to fall short of the $240 million valuation ShoeDazzle garnered in its last round of financing, a $40 million Series C in May 2011. It wouldn’t be the outcome that ShoeDazzle’s founders and investors – not to mention the LA ecosystem – anticipated just 18 months ago when everyone thought they had a massive winner on their hands. But a deal in the near term may actually represent the best possible outcome, given the options that remain. But regardless of expectations, nine figure exits don’t grow on trees and it’s tough to write one off as an outright failure.

None of this should be overly surprising, given the challenges the company has faced, and for the most part, survived in the last 12 months, as well as the challenges that still lay ahead in a brutally competitive market. For a while, the Brian Lee-founded company was the highest-profile startup in Los Angeles, raising $66 million dollars from leading VCs and generating revenue and user growth curves that resembled a Mt. Everest peak. Then Lee Left, and his successor, Bill Strauss, launched an ill-advised business model change which all but killed the hot company. Revenue and membership fell sharply, and talent began to run for the exits.

According to both Lee and industry observers, ShoeDazzle has stabilized considerably he and founding president MJ Eng returned to the company in November. The company is not growing at anywhere near the rate it once was, if at all, but it’s no longer hemorrhaging users, revenue, or cash like it was at the end of the Strauss era either. The company’s currently the solid number two in the market according to our sources, with less revenue than JustFab and but significantly more than its nearest challenger BeachMint.

During our recent fireside chat with Brian Lee, he denied looking for an exit – both personally and for the company – and made a case for why he still sees a billion dollar opportunity ahead of ShoeDazzle. But this is what CEOs do. Lee acknowledged that the company would need to raise additional funding to grow and complete the turnaround, a daunting task in today’s ecommerce-phobic market, particularly for a struggling company that raised its last round at a $240 million valuation.

It’s never easy to know when to pull the ripcord and look for an exit. This is even more so when you’re a prominent and very public founder who’s staked their reputation to the success of a company. Brian Lee is nothing if not competitive and prideful in all the ways you want a founder to be. He’s absolutely not looking for an easy way out, but at the same time, if he thinks now is the right time for an exit, don’t expect him to hang on out of sentimentality. With the search and subsequent negotiations already dragging on for more than six months, if a transaction is coming it shouldn’t be long now.

[Brian Lee and ShoeDazzle lead investor Andreessen Horowitz declined to comment for this story. Andreessen Horowitz partners Marc Andreessen, Jeff Jordan, and Chris Dixon are individual investors in PandoDaily.]

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