A ShoeDazzle Hail Mary is coming in 2013. But is it just too late?

By Sarah Lacy , written on November 7, 2012

From The News Desk

One thing is for sure: Founder Brian Lee has been busy at ShoeDazzle since retaking the reigns late September. The debate raging among my sources is whether the company is busy living or busy dying.

I spent a few days digging around about the company during my recent trip to LA, and our LA-based reporter Michael Carney has been digging for months. What we've heard fits into two camps: The first is that short-lived CEO Bill Strauss screwed up the company even worse than we'd thought. The second camp says that Lee is rapidly righting the ship, and the company may yet recover from one of the more rapid and extreme tailspins I've seen in my history as a tech reporter.

The second camp doesn't factually contradict the first-- except on the topic of the company's finances and how much runway it has. But even that will likely boil down to what exactly Lee has up his sleeve. We hear big things are coming early next year.

But first a bit of background, filled in with new information we haven't reported before.

Back in May 2011, Andreessen Horowitz lead a $40 million venture round that valued ShoeDazzle at a heady $240 million pre-money valuation.  In the pre-Fab days, that was extraordinary high for an ecommerce company. It was at that point that the company started to seriously look for an outside CEO. This wasn't at the investors' insistence. Rather, Lee fancied himself a serial entrepreneur and a startup guy, not the guy to scale an organization. But by all accounts the company picked one of the worst possible candidates in Bill Strauss.

There were basically three big reasons ShoeDazzle was valued so highly up until this point:

Reason No. 1: The subscription/stylist model was seemingly raking in regular shoppers. Even opting out of your monthly payment brought you back to the site every month. There have been huge debates over how high the churn rate was or wasn't. But I can say this with absolute assurance: Up until Strauss, there were no complaints with it on the part of the board or management. I've explained before why I loved it as a customer. I may well have been the minority, but I certainly wasn't alone and we were a little minority that was happy to pay $40 a month without ShoeDazzle doing much of anything.

Reason No. 2: ShoeDazzle's adept use of social media. At the time Andreessen Horowitz invested, it had more fans on Facebook than any other fashion brand -- just passing Prada. And they were actively engaged on the site gushing about the latest models. This was specifically one of the things that Andreessen Horowitz's John O'Farrell mentioned to me as a reason he did the deal.

Reason No. 3: The celebrity endorsement of Kim Kardashian was a lucky stroke. Lee partnered up with her on the cheap before her brand exploded. You can debate the good and the bad of celebrity endorsements. Justin Timberlake pimping housewares to 14-year-olds shopping in BeachMint's sloppy network of sites comparatively may not make a lot of sense. But Kardashian was known for fashion and had an every-girl appeal.

At the end of the day, this company is about marketing, and she gave them that for very cheap. What's more, the site didn't rely solely on Kardashian's appeal: The shoes were great, varied, stylish, and cheap. There was really something for every woman on the site.

We forget just how much of an impact ShoeDazzle had on ecommerce and LA. Before ShoeDazzle, there were scant celebrity ecommerce partners or monthly things-in-a-box companies. It did so well that it popularized both categories, and as a result breathed vital life back into the LA ecosystem.

Strauss apparently got none of this. I've already been highly critical of his idea to suddenly kill the Golden Goose of $40-a-month automatic payments from happy customers, in favor of the unenviable task of selling shoes to women on a one-off basis.

But I've since heard that he also immediately shut down the company's social media initiatives and greatly deemphasized the role of celebrity. What the hell was ShoeDazzle without those three things? In a word: Screwed. This company was all about brand and marketing. Without those, it was just cheaply made shoes from China. And there's no scarcity of those in the world.

Worse still, while Strauss was cutting those kinds of costs, he was running other far more costly experiments within the company and bringing in other expensive senior executives. The burn rate was upped substantially while revenues fell dramatically.

We're told that during this time Strauss had conversations about another funding round that went nowhere. Some say the VCs who'd proactively reached out were uninterested in investing before they could see how Strauss's dramatic new experiments would play out. Others say the company never aggressively pursued the money and the talks petered out. Either way, it was clear that everything was pretty much going in the wrong direction.

During this time, Strauss also considered purchasing other LA subscription commerce players to bolster ShoeDazzle's position. That included BeachMint -- another company that is reported by multiple sources to have had trouble raising another round. We're told, once the two companies opened their books and saw what a horrendous situation the other was in, the deal was quickly scuttled, according to multiple sources. (I should note that executives at BeachMint have long indignantly said the company isn't having any issues, but I have literally not found another single informed source who backs that up.)

Astoundingly after this many missteps, Strauss wasn't fired. Lee volunteered to take the company back, and Strauss volunteered to go. It was that clear to everyone just how badly this thing was going.

So what is Lee doing now? Well he's done layoffs of up to 40 percent of the staff and killed off many of Strauss's more costly experiments. Much of Strauss's team is gone, and we reported earlier today that Lee's former No. 2 MJ Eng is back at the company. We hear these moves have dramatically brought costs back into line.

Lee isn't just rearranging deck chairs. We hear he is working diligently on growing revenues too. While Strauss experimented in spreadsheets, Lee experiments with continual offers, tweaks, specials, and lures for real world customers.

In some ways, the moves seem contradictory. ShoeDazzle has dramatically upped that set-in-stone $39 price point it was known for, with shoes selling for as much as $199 on the site now. These are "designer brands" ShoeDazzle likes, but I'm not sure the same customer comes to the same place to get $40 knee-high leather boots and $200 ones. That's like finding some Tory Burch shoes in Payless.

Meanwhile, I keep getting offers for discounts and points and all sorts of other promotions that make little sense when you compare them to one another. I'm totally confused about which promotion I should accept in order to get the best offer. Both discounts and price hikes at once? So far, the approach has been scattershot to say the least.

But we hear this is all a prelude to a few big moves coming in January or February. It's possible one or all of those may hearken back to ShoeDazzle's subscription roots, although it's unlikely the company pulls a full 180. We don't have a lot of details on what these moves are. Lee is clearly keeping his own counsel on this. But we are told from reliable sources he does indeed have a plan, and it's not just for more BOGO offers and triple points. Something big is coming, and the remaining team is said to be very engaged in whatever it is.

The most conflicting reports surround the company's financials. Many people have told us that the company has not been able to raise more money -- whether that was during Strauss's era or the response to feelers put out more recently. The company did raise a modest $6 million follow on round, but it was purely from insiders including Lightspeed, Andreessen Horowitz, and Lee. Some have indicated this is the last runway the company has without having to do a substantial down round from it's heady 2011 valuation. Others have said with the cost cuts, and existing money in the bank, the company doesn't need more.

Either way, the company has at least enough to get to Lee's bold moves early next year. If they work, the company will likely raise more to expand. If not, it may keep cutting and experimenting and start looking for a soft place to land. Either way, it's all in Lee's hands now, and that has to be better than in Strauss's hands.

Still, Strauss should not be the scapegoat in how ShoeDazzle got here. People close to the company point out that he had little understanding of branded experiences or celebrity, and was accustomed to running a more mature company. He never seemed to understand what made ShoeDazzle tick. People say over and over again he is a spreadsheet guy and not a customer guy.

So why was Strauss hired to begin with, and why was he given so much rope?

ShoeDazzle was started by one of the best entrepreneurs in LA, who already had one big hit under his belt, and it raised money from some of the smartest investors in Silicon Valley. Where the hell were they? Why did Andreessen Horowitz and Lightspeed hire someone who was so out of sync with the company and why did they allow him to make decisions that totally took the company in an opposite direction from the very reasons they told me they invested in the first place?

Neither Lightspeed nor Andreessen Horowitz nor Lee will talk to me on the record in recent months, but I've been told by several sources close to the situation that the CEO search was exponentially harder, because the company was based in LA. Many candidates did not want to move south a few hundred miles, and there weren't many local candidates with the relevant experience, given the nascent ecosystem. So at the end of the day, the company settled. You could further speculate that had ShoeDazzle been in its investors' backyard, they might have been more engaged with the company's operations and headed off Strauss before he did so much damage.

Here's the cautionary tale of ShoeDazzle: Don't think because you've hit on something and raised money from a top firm at a huge valuation that you're done. Especially if you're in an ecosystem outside the Valley. Because if you do make a mistake, recovering from it is exponentially harder when you're farther from the nexus of the world's startup talent and cash.

Yes, LA has it way better than most places in the country, when it comes to raising capital, amassing a team, and getting press attention for your startup. But there is way less room for error, and one mistake can be lethal in a way it wouldn't be just a few hundred miles to the north.

For what it's worth, I still believe a big exit will come out of this crop of LA companies. And by big, I mean something that beats MySpace in price and staying power. Silicon Beach is broad enough that it's not solely reliant on trends like things-in-a-box or celebrity endorsements. Many companies are reengineering content businesses in new and interesting ways. And there are some formidable local advocates. Science is one of them, and Chris Sacca's new LA fund is another one. And let's not forget that Elon Musk -- one of the single best entrepreneurs in the history of tech -- lives in LA. If all else fails, they've had SpaceX and Tesla.

It won't surprise regular readers that I'm bullish on NastyGal-- particularly watching what's happened to ShoeDazzle. Twenty-eight-year-old founder Sophia Amoruso built the company to a $128 million revenue business mostly on her own. She still has dominant control of the company and exactly one other board member in Index's Danny Rimer. She's not going anywhere as CEO. There's no next company for her. She may well screw up, but it'll be her screw up at least, not someone who doesn't understand what she built.

Another likely winner pains me to admit: Arch ShoeDazzle rival JustFab. Michael Carney and I have long had the JustFab vs. ShoeDazzle argument. I've been turned off by some of their aggressive smack-talking and claims about ShoeDazzle that just weren't true, according to my reporting. The two look-alike companies resulted as an early disagreement between the founders, and JustFab is an aggressive copy of ShoeDazzle's model, which was first in the market.

ShoeDazzle has long argued since the time they killed subscriptions that the model had flaws that would catch up to its competitors. If JustFab is experiencing them, they're doing a damn good job of hiding it.

And of course, as long as ShoeDazzle has money in the bank, they may yet turn things around. Personally, I'd love nothing more than a grand, dramatic ShoeDazzle success story. I'm also still hoping that Lee's third company will make it too. Diapers are a brutal business that the existing consumer package good companies will defend at all costs. But I get both monthly bundles, and I absolutely love the product and the service. (Except the wipes, which are atrocious. They don't come out of the package one-by-one, but in an unusable clump of 20. Perhaps Jessica Alba has an extra pair of hands to gingerly separate organic wipes, when her kids have blowout diapers. The rest of the world does not.)

But as I've said before, Lee can likely only lead one of these companies to victory. I don't envy him the decision, as neither represent easy problems to solve.

Good luck, Brian. We'll be watching closely in January to see what you've got.