Beach

Here’s the thing about the LA-based subscription commerce company BeachMint: The main reason people frequently characterize it as a “struggling company” is the massive expectations they created when they raised a huge $74 million in equity (plus another $12 million of debt). The valuation was even more ambitious: $200 million. That’s about five and a half times what its competitor ShoeDazzle ended up selling for.

Even worse, some $60 million of that is already spent, and BeachMint — arguably — has little to show for it. It’s done a complete 180 on its game plan and badly missed revenue targets two years in a row.

But if BeachMint is not in immediate distress, that’s largely for the same reason: It raised such a gargantuan haul of venture money.

To wit: The biggest difference between BeachMint and fellow challenged LA commerce company ShoeDazzle is thatBeachMint raised about $20 million more (including equity and debt) and completed its last venture round a full eight months later. That gave BeachMint another year of runway, while ShoeDazzle, weighed down by many of the same forces, succumbed to what most view as a “face-saving acquisition” by JustFab.

For the last year, we have been working hard to get to the bottom of the great mystery of BeachMint. In case you haven’t been following this saga closely, this is not the first time we’ve attempted to peel the curtain back on the LA-based subscription ecommerce business. In July, we published a story based on overwhelming information from multiple sources about an impending board action to remove the founders and withdraw the company’s remaining capital. The founders and investors flatly denied these reports. Indeed, the founders are still in place today, and what’s left of the money is still in the bank.

The aftermath of this exchange included a stranger-than-fiction appearance by a famous political spin doctor, and left more questions than answers about BeachMint’s business. It’s a company that dozens of sources in LA, New York, and Silicon Valley universally tell us is struggling, and yet, one that the founders and its board repeatedly describe as “strong” and “solid,” with a “phenomenal team” that has the “full support” of its board and is poised for “continued success.”

The company’s unwillingness to talk didn’t help clear up the discrepancies. Until now, that is.

Last month, BeachMint finally went on the record with PandoDaily at an exclusive in-person sit-down at their Santa Monica offices. Co-founders Josh Berman and Diego Berdakin were there, as were recently added COO Greg Steiner and in-house counsel Robert Zakari. 

The atmosphere was more cordial than you might expect, given our past, but it was a strained cordiality at times. All we promised was to ask every hard question we had on the company, and they’d promised — for the first time– to answer them. We didn’t pull punches, and they rarely went off the record. Our only interest was to get a clearer idea of what is going on at BeachMint, beyond the rumors, the off-the-record reports, company leaks, and emphatic founder denials. 

“We’re dealing with the normal stuff all normal companies deal with,” Steiner says. “It feels like for whatever reason people haven’t given us a fair shake.”

The take away: Management is aware that they’re in a tight spot, but they have a plan and the remaining cash to implement it, if the next nine months go as they hope. The numbers, while still not healthy, are the best they’ve ever been.

“We’re dealing with the normal stuff all normal companies deal with,” Steiner says. “It feels like, for whatever reason, people haven’t given us a fair shake.” Adds Berdakin: “I’d be a lot more surprised if we were sitting here today in a meeting, and I told you the assumptions we made six weeks into our company were dead on.”

Such “aw shucks” statements aside, unanswered questions remain. BeachMint’s founders and senior management continue to rebut the many concerns raised by sources very close to the company. Claims like cultural problems, reckless spending, and a lack of operational discipline. Still, we came out of the meeting with a clearer understanding of this disconnect than we had before and the beginnings of a roadmap for where this company is headed – or hoping to end up.

In short, BeachMint is a company still trying to find its footing and earn that whopping $200 million valuation. But because of all that cash, it has another year to figure it out. And the founders are hustling to do that — slashing their burn rate, changing their merchandising and distribution models, killing verticals, raising prices, eschewing discounting, and generally doubling down on the areas that have worked for them.

Their recent public bluster aside, they feel the heat. And for BeachMint’s board, shareholders, and employees that’s a good sign.

Over an hour and twenty minute meeting the executive team’s newfound focus was clear. Here’s where BeachMint stands, to the best of our understanding.

CEO Josh Berman, left, and President Diego Berdakin

BeachMint CEO Josh Berman, left, and President Diego Berdakin

“It was working until it wasn’t”

To understand BeachMint’s current situation, you have to understand the change in thinking around verticals. It’s the one of the biggest reasons the company seems to be struggling so mightily from the outside, and a major factor in the company’s massive burn rate and wild revenue misses to date. A reining in of the company’s ambitious vertical strategy is also the biggest reason BeachMint has been able to bring its burn rate under control so dramatically in the last year.

Originally BeachMint was on a mission to build scores of semi-independent businesses in parallel. It got through six before realizing that this was a fool’s errand, and has since pared back to four verticals, which are more integrated than ever before.

Long gone are the days of launching a vertical a month. HomeMint (housewares) and BeautyMint (cosmetics) are closed. The company is focused on the remaining verticals JewelMint (jewelry), StyleMint (apparel), ShoeMint (shoes), and IntiMint (lingerie). And within those, there is one mission: Eliminate inventory risk and discounting while focusing on raising the quality of revenue and the lifetime customer value as high as possible. (More on that in a bit.)

There’s only one thing wrong with this approach: It took BeachMint $60 million in capital to get here. Plenty of people in the subscription commerce category have long said a strategy of dozens of loosely related verticals wouldn’t work. In practice, things were even more convoluted. Each vertical had its own quirks, supply chains, warehousing arrangements, and even IT and fulfillment systems.

BeachMint was effectively having to reinvent the wheel with each one. In the words of company Berdakin: “The strategy was working, until it wasn’t.”

“And it turns out we were wrong just like the board was wrong. Every vertical we launched was bigger than the one before it”

Statements by Berman, Steiner, and Berdakin about how hard it was to build all these verticals are a bit mystifying. How could they not have known designing inventory, manufacturing it, shipping it, and acquiring customers in a myriad of loosely connected categories would be hard? Particularly without any merchandizing or e-tail experience at the senior levels?

“Maybe in retrospect, it’s obvious. But I promise you at the time everyone was saying more verticals, more verticals,” Berdakin says. “We had investors who were saying we should launch a vertical a month and then a vertical a week. That was what they thought was the grand master plan. And, look, we all jumped into thinking that was the best operating plan. And it turns out we were wrong, just like the board was wrong. Every vertical we launched was bigger than the one before it was, and we made certain assumptions based on those things.”

He continues, “We all sat in a room – smart people – and we looked at all the data that we had at the time. And every single board member — these are not dumb investors – they are not just giving you a pass and saying, ‘Oh do whatever you want. We trust this is going to work out.’ They’re all smart people. [We] all sat together, and all made decisions. It is what it is.”

By early 2013, it became clear this strategy was unlikely to ever work. It was only last month, however, that it officially shuttered its two non-fashion verticals – neither of which ever gained any material traction. You could argue, given all the evidence that this strategy was toast, they could have moved quicker.

Olsen TwinsWhen we met with management last month, they told us some major partnership announcements were coming before year’s end. The first was announced earlier this week, with the company deepening its relationship with the fashion icons and former child stars Mary-Kate and Ashley Olsen.

The 27-year-old fashionistas were initially the face of the StyleMint brand, a two-year relationship that expired in July. But this was largely a paid endorsement role, Berman concedes. The Olsens are now co-chairs of BeachMint’s advisory board, where they will have greater input over the entirety of the company’s product and merchandising efforts. They are also shareholders, thanks to an equity grant related to their increased roles.

Berman says the next two announcements will be more significant and will dramatically alter the company’s product merchandising and distribution models. He says the deals are more substantial than more celebrity partnerships.

This sharp change in vertical strategy — cutting out everything that’s not women’s fashion and doubling down on the quality of product and a reduction in inventory risk — are the core of BeachMint’s plan to turn the business around and paint a healthy enough picture to raise more capital come the middle of next year.

“We’re as close to profitability as we’ve ever been”

Arguably, the biggest improvement at BeachMint over the last year has been reining in costs – something its founders are quick to declare. Over the course of our 90-minute sit-down, BeachMint’s slashed burn rate came up over and over again.

According to multiple sources with knowledge of the company’s financial situation, BeachMint has more than halved its outflow from a high of $3 million per month in 2012 to less than $1.5 million each month today. BeachMint’s management wouldn’t confirm these exact figures, but said it was more than half what it was a year ago.

It’s something to brag about — to be sure. That slashed burn rate is largely the reason the board is sticking with management despite its many challenges. But it’s also a tacit admission that the company had a spending and a strategy problem. It’s the biggest sign that the founders get the challenging situation they’re in, and are seeking to extend their existing cash long enough they can figure out the rest.

Part of cost cutting has been eliminating verticals, another is the trimming of staff. The company once employed more than 150 people but is down today to a more manageable 100 or so. Steiner calls it the right sizing, but many industry executives and investors we’ve spoken to question whether this is still too many employees for a company in BeachMint’s financial straights. The company is also heavy on senior management compared to most companies with its level of sales, these experts say, given that it’s got a CEO (Berman), COO (Steiner), President (Berdakin), and several senior VPs.

Another change has been an overall tightening of the belt on spending. BeachMint was always known as a company that like to eat, drink, and be merry. Lavish nights on the town and wild trips to Mexico were a regular occurrence for highly visible members of its team. One ex-employee claims that senior management spent more than $80,000 at a single Santa Monica sushi restaurant in a 12-month period. But whether this is accurate or not, it seems that the company has put this type of behavior behind it, either out of necessity or forced maturity.

A lot of this discipline no doubt goes back to the addition of Steiner to the management team. The former eHarmony COO has been generally lauded as a calming force within the company and a much needed injection of operational experience. While Steiner bristles at the idea that he was hired to “babysit” the founders, his involvement is one of the few things that even BeachMint’s critics cite as an undeniable asset. “The cost-cutting you’ll see going forward from us is related to cost of goods,” Steiner says. “Moving warehouses and logistics providers. Money goes, when you are shipping this many units a month. The price of a box matters.”

But every entrepreneur knows you can’t really cut your way to growth. Now that the business is right-sized in terms of team and spending, a more substantial effort is under way to control costs: Going to a largely inventory-free model. We’re told that the upcoming partnerships will directly impact this shift, but we will have to take them at their word until additional details become available.

“In 2014 we’ll have almost no inventory exposure,” Berdakin says. He continues, “We’re as close to profitability as we’ve ever been. Compared to any normal company it’s growing well. Compared to the hyper growth of Internet companies, yeah, it’s not where we initially [wanted to be].”

“We’re still a startup,” Steiner says. “We still burn capital. But the company is growing. It’s how you characterize distress. We’d like to be growing faster – I think a lot of startups would.”

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“We could be selling shoes for $50 and selling a lot more of them”

If cost cutting is the most impressive thing the management team has to brag about, revenues may be the most worrying sign. Recently, we received copies of the company pitch materials sent to investors in May 2012 and again in May of this year. In the words of one investor who passed on the deal twice, “The miss on revenues was staggering.”

Based on these documents, and further confirmed by people briefed on the company’s financials, it looks like BeachMint is on pace to generate approximately $20 to $22 million in revenue this year, up 25 to 40 percent from the $16 million that it generated in 2012. It’s still going to lose between $15 and $20 million on the year, we’re told.

As of May, when the company was out looking to refinance its existing debt facility, it was projecting $30 million of 2014 revenue and similar losses of $17 million. But these figures may change as a result of the company’s increased financial discipline.

BeachMint’s founders wouldn’t comment or confirm those exact numbers, saying they don’t recall all of the projections they’ve made at various points in the company’s history. Like a lot of startups, projections change rapidly, as you gain additional data. Revisions are normal and to be expected.

What was worrying to sources we spoke to was the magnitude of the miss. The company’s May 2012 projections had it generating $40.1 million last year and $128 million this year. It looks like the company will fall short of those estimates by a whopping 60 percent and 83 percent, respectively.

Berdakin says it sounds to him like our sources are wrong. “It feels like that revenue target is off — I don’t remember anything like that,” he says. Although he added, “We are not saying we hit our plan. We’ll be under what we’ve projected this year.”

He says later, “Maybe at times we all had these crazy unrealistic expectations, and the reality is, as we started to scale that business, we saw how that trickled to the bottom line and…we didn’t want to pursue that path.”

But to be fair, BeachMint has a decent explanation for why its revenue projections will have missed each of the last two years: It’s no longer chasing top line growth, or users, or vertical expansion. It’s focused on quality in all these areas and is down to just a few brands. The company is also taking far less inventory risk, charging greater premiums for its goods, and aiming to acquire customers profitably without discounts.

“We have spent the last year pounding this into [the company],” Berdakin says. “This is the fiber of our company. Better quality revenue.” 

“It’s not about chasing this vanity metric that is huge top line revenue growth,” Berdakin says. “Not that we don’t want to grow our revenues. That’s definitely not what I’m saying. But just growing your revenues without thinking about what trickles to the bottom, and how you create real gross profits dollars… That’s what we’re really focused on.”

The founders get animated on this topic — perhaps more than any other we discussed. “We have spent the last year pounding this into [the company],” Berdakin says. “This is the fiber of our company. Better quality revenue. You can easily grow top line revenue. It’s not hard to do. We could have easily hit our plan, but it wasn’t the right business to be in. If that results in gossip and rumors, that’s fine. We know we have a good business.”

BeachMint certainly could have spent its way to higher revenues. We’ve criticized other ecommerce 2.0 companies for doing just that. But it couldn’t have done that and stayed in business, because it would have decimated its enviable runway. Cutting costs and lower revenues had to go hand in hand. Put another way: To cut the burn rate, it had to sacrifice its lofty targets. It was undoubtably the right call. The problem is BeachMint had raised more than $70 million at a $200 million price based on those targets.

“If we have to build it more slowly to make it more sustainable, that’s the path we have to go down.”

One way BeachMint expects to generate “better” revenue is charging more for its products. Last month, the two best-selling shoes were priced at $119 and $129, Berdakin says. That’s up from the company’s $79 average price point in years past and nearly triple the prices charged by the company’s nearest competitors JustFab and its newly acquired subsidiary, ShoeDazzle.

“We could be selling our shoes for $50 and selling a lot more of them than we do today,” Berdakin says. “Our average price is north of $100, and that puts us a world apart from the others in our category, because we wanted to have real margins. That means it’s harder to sell that shoe to that customer. But when they come in and buy that shoe, it means their lifetime value is also a lot higher.” He continues, “If we have to build it more slowly to make it more sustainable, that’s the path we have to go down.”

Diego Berdakin

“Every investor is going to invest based on data”

There has been a lot of confusion over whether BeachMint needs to raise more money or not.

A recent thread of reporting that landed us in BeachMint’s offices came from people with knowledge of the company’s efforts to refinance a previously unannounced $12 million debt facility from WTI. Under the terms of the loan, which was issued in early 2013, the debt carries a 12 percent APR and begins amortizing this month.

BeachMint hasn’t denied the line, that the accrual is coming due, or even that they’ve been making efforts to refinance. Steiner characterized it as “just a prudent business thing to do.” The founders said that the current business plan, which gives them enough cash to operate through the end of next year, does not require renegotiating this line of debt. They characterized doing so a “nice to have,” not a “must have.”

So what about the wide reports that the company has been unsuccessfully trying to raise additional venture capital? The company acknowledged that they were talking to investors in the past about raising even more capital, but this was largely tied to a more aggressive strategy around acquisitions. They’ve also had conversations about various international joint ventures.

Co-founder and CEO Josh Berman was very clear during our September sit down: “This is not a company in distress.”

The founders say this strategy has changed, as they’ve taken on this new mantra of extreme focus and financial efficiency. And with that, their plans to raise money before the middle of next year changed. That’s not to say that the money would have been available, had they decided to continue down this path.

Although Steiner added the caveat: “The reality is you are always passively raising money. These are capitally intensive businesses, and these guys talk to people all the time.”

Beachmint

So is BeachMint in trouble?

Co-founder and CEO Josh Berman was very clear during our September sit down: “This is not a company in distress.” Given the runway and board confirmation that they are not requesting the $20 million or so in remaining capital to be returned, basic math supports that statement. Steiner says the company is finally “right sized” in terms of headcount, after several rounds of layoffs reduced its head count by nearly 30 percent from its year-ago high. And already BeachMint has closed the two of its six verticals.

But Steiner added this to Berman’s declaration of health: “Come talk to us in eight, nine, ten months, and maybe it’s a different situation.” During our meeting, it was clear that if there was one thing everyone in that non-descript Santa Monica board room agreed on, it was this: The future of BeachMint will depend on what happens in the next few quarters. 

The company still has a lot to prove. While revenues are growing, they are growing less than 50 percent and off a pretty small base, given the company’s valuation. Even if things go according to plan, BeachMint will likely have to start raising money again sometime next year. When asked if the company has enough cash to finance its plan, Berman said, “To be honest, not forever. Just through 2014.”

It would have to move ecommerce mountains between now and then to get a higher valuation than its last round.

By comparison, ShoeDazzle reportedly sold for $37 million on about the same amount of revenue, but even that figure was said to be partially representative of assumption of debt by its acquirer JustFab. When HauteLook sold in 2011 to Nordstrom for $210 million, it commanded a 1.8 multiple on its reported $115 million or so in revenue. The company was also said to be growing  at greater than 50 percent year over year. When Nasty Gal raised $40 million in 2012, it commanded a $240 million valuation, but was reportedly generating north of $100 million in revenue and profitable.

If reports are true, Fab commanded a $1 billion valuation on just $250 million in projected 2013 revenue – and more than $50 million in losses at some estimates. But making this four-times multiple somewhat justified is that it was growing in the neighborhood of 100 percent per year (although recent reports indicate that this pace may be slowing, forcing the company to modify its business plan and projections).

The bottom line is high growth ecommerce companies with healthy unit economics can command valuations of one and a half to — in the rarest of cases — four times their revenue. If BeachMint hits its $30 million 2014 target, it would have grown 35 to 50 percent (depending on where 2013 ends up). By industry math, the company would be looking at a valuation of between $45 to $120 million — most likely less than half of the $200 million it commanded in its January 2012 Series C round.

BeachMint is backed by a long list of prominent VC firms all of which will be looking for a return on their investment. The list includes Accel Partners (who is also an investor in PandoDaily), Goldman Sachs, New World Ventures, Millennium Technology Value Partners, New Enterprise Associates, Trinity Ventures, Scale Venture Partners, Anthem Venture Partners, NALA Investments, Lightbank, Stanford University, and individual angels.

Of the company’s fundraising prospects, Berman says: “I definitely think we could raise next year if we like the growth and investors like the story. Now is it going to be an up round, a down round, or the same? I don’t know until we’re in the market.”

At earlier rounds BeachMint could spin a good story. Now there is nowhere for them to hide.

According to management, there are two more partnership announcements coming in the next several weeks that will dramatically alter BeachMint’s story. Stay tuned.

The founders get what they have to do between now and fundraising. “Every investor is going to invest based on data,” Berdakin says. “If you are a mature business, and you’ve been around for three-plus years now, they want to see what the facts are. They want to see what customers paid you and what you paid to get them. If there are positive united economics. The better they are, the more interested they will be.” 

Put another way: At earlier rounds BeachMint could spin a good story. Now there is nowhere for them to hide. They’ll either figure this out in the next nine to 10 months, or find themselves in a position similar to ShoeDazzle’s.

The reality, however, is that what many people in the industry have characterized as an irresponsibly frothy C-round is the only thing giving BeachMint this do-over. The clock – while it stretches through the end of next year – is ticking.

[Images via: 41Ocean, Entrepreneur, Shopzine, LA Times, NALA]

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