When massive growth can be hazardous to founders

By Michael Carney , written on May 10, 2013

From The News Desk

As a startup founder, even seemingly positive things like massive growth can be a curse. Or at least it seems that was the case for the co-founders of activewear ecommerce startup Ellie. CEO Marcus Greinke and Chief Creative Office Lindsay Daniels were removed from the company by its board of directors in April. Greg Wimmer, who was originally a consulting COO to the company, has joined the company full time in the role of President.

When Ellie launched in February, coming out of the Science technology studio, the company saw massive engagement and growth. Science co-founder Mike Jones calls it the best first month of any Science company ever, including the well known DogVacay and Dollar Shave Club. For Greinke and Daniels, this was great in theory. In reality, it was more than they were prepared to handle.

“We didn’t see the trajectory that we wanted to see in the second month,” Jones says. “The board wasn’t sure that management was up to the task of running this at scale. But fortunately, we had a strong COO already in place and were able to transition him in relatively seamlessly.”

Prior to Ellie, Wimmer was CFO of SkinIt, VP Finance & Administration and VP Business Operations Fox Interactive Media, VP Finance Photobucket – where he worked with Science co-founder Peter Pham – and CFO of Wavemarket. Most recently, he had been a consulting CFO and COO to early stage technology companies.

Under its founding management, Ellie generated massive demand – a Science specialty – but critical functions like quality control, fulfillment, and customer service weren’t up to par. Orders were going out late. Vocal complaints in online forums weren’t being handled with enough finesse.

And then there was the transition from PV Body, an early brand and business model used by the company, prior to Ellie's launch in February. For nearly six months prior to this public launch, PV Body was quietly offerring women active wear from other brands at discount prices. And while this was popular with customers, the margins and limited product availability ultimately proved the model unsustainable. With this realization, PV Body transitioned to making and designing all of its own product under the Ellie brand.

“Initially Ellie was going to be a private-label brand that we sold through PV Body,” VP of Marketing Erik Huberman says. “But after we literally sold through 100 percent of American Apparel’s yoga-pant inventory in one month, we knew it just wasn’t going to work.”

While the move to Ellie was a smart business decision for the young company, it wasn’t effectively communicated to its customers and to the fitness-blogging community which had been so supportive. As a result, the confusion and eventually the backlash were significant. Ultimately, this all came back to management. A quick scan of online forums suggests that a significant portion of this anger was directed – rightly or wrongly – at Greinke personally. Science, for what it's worth, claims that public relations was in no way a consideration in management change.

For many founders, the early days of a startup are one of trial and error, where on the job learning is par for the course. But in the case of Ellie, it appears that Greinke and Daniels were in some respects victims of their own success. On the day Ellie launched it had 50 full-time employees – a number that has since fallen to approximately 30. Add in tens of thousands of members and thousands of monthly orders and there were no training wheels or room to fake it ‘til you make it. Once it became clear that the business had outgrown its management, a change was quickly implemented.

The rapid and decisive action by Science and the rest of the company’s board of directors is a testament to the incubator, or technology studio model. In most companies that it backs, including Ellie, Science acts as a co-founder and even plays a principal role in coming up with the business idea. The studio then constructs a management team around that idea and contributes the first round of capital, as well as general advisory, legal, and customer acquisition services.

Even when a company “graduates” from the incubation phase, Science stays intimately involved. And in cases where things don’t go as planned, the mothership is there to provide support in whatever manner is necessary. While this can be a blessing and a curse to founders, it is something that should be comforting to outside investors considering backing an unproven early-stage business.

According to Jones, April’s results were “back on track” following the management change. Huberman further confirms that orders are being sent on time, and quality control and customer service have been improved.

Ellie still faces a significant uphill climb to prove that this is a sustainable business. Apparel is an incredibly tough industry, especially when operating on a limited scale. Further, women’s yoga and activewear is a category dominated by several large and entrenched brands, including Lululemon, Nike, Under Armor, Adidas, Reebok, Hardtail, and others. By comparison, Gap’s activewear line Gap Fit has performed underwhelmingly, despite the company’s massive resources and distribution. For Ellie to be the one in 1,000 brand that survives this early stage will be a significant challenge.

As a backer, Science has shown it can build an impressive customer-acquisition machine. And with this latest management change, it has shown it believes in the Ellie concept and is unwilling to let it flounder. It doesn’t hurt that the company has to make good on the $2 million in seed financing it raised from Trinity Ventures, Rustic Canyon Partners, and Blumberg Capital – a number that includes Science’s initial contributions.

“We see this as proof that the Science model works,” Jones says. “We keep actively involved and have talent and other resources available as it becomes necessary.”

This isn’t Wimmer’s first time around the entrepreneurial block, nor is it for the rest of the Science crew. To the extent that it’s possible to turn Ellie into the success that they’ve envisioned since before that explosive launch, this team is well equipped to pull it off. But while it may take a village to build a startup, all the talent and experience involved isn’t always enough.

Jones – who is not as prone to blind optimism as some on his team – remains incredibly bullish on Ellie. Given the unforgiving nature of fashion ecommerce, we’ll know soon enough if the latest move was enough to make the company a winner.