Whoa: Struggling ShoeDazzle is now cash flow positive. Brian Lee may actually pull this off

By Sarah Lacy , written on December 5, 2012

From The News Desk

Is ShoeDazzle in some weird startup time warp where it moves at a faster pace than the world around it?

It zoomed towards a $300 million valuation faster than most of the early ecommerce 2.0 companies, raising hopes for LA's tech boosters and sparking a feeding frenzy of celebrity-endorsed, stuff-in-a-box companies.

Just when things were going well, founder Brian Lee stepped aside to focus on his third company, Honest. The board hired Bill "good guy" Strauss to replace him. And so began one of the fastest deteriorations of a hot company I've ever witnessed. Within just nine months, ShoeDazzle's financial position deteriorated rapidly, as costs soared under Strauss and sales fell.

This was the big red flag to the board, although there should have been others. Strauss managed to alienate most of Lee's lieutenants, who left to make room for Strauss's pricier, bigger management team. And worse, Strauss rapidly dismantled almost all the things that had set ShoeDazzle apart: the subscriptions, the adept use of social media, and the celebrity endorsements.

As we first reported a few weeks ago, Strauss also examined merging with the also-flailing BeachMint, which would have brought on a whole new slew of problems. Fortunately for both companies, the talks didn't get very far.

The situation was a total mess by the time Lee decided to step back in, and Strauss -- from what several sources tell us -- actually volunteered to go. The company managed to do a small follow-on funding, but, we hear, only because Lee put down a good deal of his own money into it, as did existing investors Jeremy Liew of Lightspeed and John O'Farrell of Andresseen Horowitz.

Back then, we heard from multiple sources down in LA that ShoeDazzle couldn't raise more money beyond this, and that its costs were so misaligned with revenues that the company may not survive far into the new year. Certainly another outside round would have resulted in a lower valuation -- which can be almost as damaging for a young company. The more I pulled on that thread, I was heavily cautioned by a source close to the company not to write that story, lest I look dumb in a few short months.

Sure enough, today we hear that Brian Lee has pulled ShoeDazzle out of its absolute financial nose dive, even more rapidly than it entered it. We have it from a source close to the situation that ShoeDazzle actually became cash flow positive in November: a result of both dramatic cuts and a jump up in revenues.

That's just a few short months after Lee took back control of the company. He may have blown it on picking his successor, but give the guy credit for voluntarily coming back in, plunking down millions of his own money as a sign of commitment, and then working like a ninja to right the situation.

Lee rapidly cut 40 employees and ended a lot of the more pricey marketing experiments Strauss was running, like some pretty awful television commercials. Lee brought back in his old number two MJ Eng. And he has thrown a flood of promotions at current and lapsed users in an attempt to woo back people who left once Strauss foolishly cancelled all of their subscriptions for them.

There are buy-one-get-one offers, 20 percent off offers, triple-point offers, and, now, something called "12 days of dazzle" where every day users get a new special offer. He's been pushing cheap shoes and pricey shoes and flats and pumps and boots. It's had a "Crazy Eddie's used car lot" feel at times. But while apparently juicing revenues, these promotions have also likely given Lee valuable insight about where his customers' heads are these days. My guess is they've been less about selling shoes and more about waging quick, real time tests of what the users really want from the site.

So Lee has undone the financial damage. But can he fix the customer experience? Clearly, he will need a better plan than a crazy quilt of endless, varied promotions.

We shall see come January. As we first reported weeks ago, Lee has a bundle of new Hail Mary moves he's throwing out early next year, and I'm betting at least one of them has to do with bringing subscriptions back.

ShoeDazzle may never return to its former glory and trajectory, but it doesn't look like it's going under or raising an emergency infusion of cash either. And while local competitors and haters may have to suspend their grave-dancing plans, ultimately that's good news for the LA ecosystem.

Throughout it all, ShoeDazzle has had one big advantage on its side: It never rapidly expanded into other verticals. This has been the kiss of death for companies like Gilt and BeachMint, leading to time and costly mistakes and embarrassing retrenchments.

One final note: What a roller coaster of a year for Lightspeed's Jeremy Liew. Last year, two of his hottest portfolio companies were ShoeDazzle and LivingSocial, both of whom have been under their own intense financial pressure in the second half of 2012. According to our source today and an email from Liew yesterday, both have just barely eked back into cash flow positive territory making things slightly less disastrous -- although LivingSocial is hardly out of the woods and appears to have a lot more issues. If Liew makes money on either he will have earned that return the hard way.