[UPDATED] Sources: BeachMint ousts founders, company returns $20 million to investors. Company flatly denies story
Note: Beachmint is disputing this story. We've issued an update here and continue to report and will add additional information as it becomes available. Our original headline read: BeachMint board ousts founders, company returns $20 million to investors. We updated it at the company's request when new facts came to light.
The long, slow unraveling of Los Angeles area ecommerce startup BeachMint appears to have come to an end. Multiple sources with knowledge of the situation tell PandoDaily that the company’s co-founders, CEO Josh Berman and President Diego Berdakin, have been removed by its board of directors. Additionally, we’ve been told that $20 million will be returned to investors.The news comes as little surprise to those who have been watching the company and the women’s fast fashion ecommerce space closely. BeachMint has struggled to achieve the traction or the unit economics of its two closest competitors, category leaders JustFab and Shoedazzle – both of which also happen to be located in LA. As we documented over the last eighteen months – despite denials from the founders – there have been persistent signs of internal strife among the team, punctuated by the departure of multiple senior executives and numerous batch layoffs.
The company quickly ballooned over its three years from one brand at its launch, JewelMint, to six brands at its most bloated point, with the subsequent addition of StyleMint, BeautyMint, ShoeMint, HomeMint, and intiMint. Each brand had a celebrity endorser, and in most cases a subscription business model. But according to financial and traffic data obtained by PandoDaily at various points over the last year, only JewelMint and ShoeMint ever generated any meaningful traction – and even that wasn’t enough to make them sustainable. The remaining four brands have largely been left to idle since last Fall, according to multiple sources, ostensibly as the company waited out the remainder of its celebrity endorsement agreements.
BeachMint raised a total of $73.5 million over four rounds of venture financing, the most recent of which was a $35 million Series D round in January 2012 led by Accel Partners, with participation from new investors Goldman Sachs, New World Ventures, Millennium Technology Value Partners, and existing investors New Enterprise Associates, Trinity Ventures, Scale Venture Partners, Anthem Venture Partners, and NALA Investments. Additional early investors not participating in the most recent round include Lightbank, Stanford University, and several angels. (Disclosure: Accel is also an investor in PandoDaily.)
While $73.5 million may seem like a lot of money – and for all practical purposes it is – scaling an ecommerce business takes massive resources. Scaling six of them in parallel, even conceding obvious economies of scale, apparently proved as much under BeachMint. Fast fashion category leader JustFab, for example, has raised $108 million in outside financing to date, not counting the millions of initial capitalization from its parent company Intelligent Beauty. ShoeDazzle raised its own $66 million, and yet neither LA company has proven itself sustainable for the long term. Fab may be the king of cash burning ecommerce companies, having raised $321 million to date without reaching profitability.
We’ve heard from numerous sources over the last six months that BeachMint’s founders have been looking to raise additional capital, and have been focusing on Asian investors. Most have described the targets as "dumb money," and we've even heard multiple times that access to US and Asian celebrity endorsers was dangled as an extra incentive to potential backers. The team has taken several overseas trips recently hoping to come back with a financial lifeline, but given today’s turn of events, it would appear that these efforts fell short.
It’s easy to question why BeachMint needed to raise more money if it still had $20 million in the bank and why the investors would pull the plug now, rather than wait to see if management could put the remaining capital to good use. Prevailing wisdom among industry observers is that the company likely determined that its turnaround effort would cost far more. Assuming, hypothetically, that this number was $50 million, it would be reasonable for investors to say, “Don’t spend our $20 million unless you have another $30 million behind it.” The alternative would be a proverbial bridge to nowhere.
According to one source, both Berman and Berdakin were spotted eating lunch today at popular Santa Monica club 41Ocean (where Berdakin is a minority investor). What was noteworthy about this particular lunch is that the two founders were eating simultaneously at the same location, but separately. Berdakin was said to be dining with Lightbank partner and BeachMint board observer Paul Lee. Berman was seated with an unknown individual whose sources described as "dressed like a VC."
BeachMint has been criticized for its fratty, party culture. Berdakin is a minority investor in 41Ocean and many members of the community have noted the surprising amount of time he spends there both during and after working hours. Berman has been the subject of similar questions about his focus, with many current and former employees characterizing him as “disengaged” and “absent” over much of the last year. Sources tell us that this was tolerated by company investors while it was growing, but has been viewed less favorably since times got tougher. Whether BeachMint’s failure can be attributed to its founders’ social lives is unclear, but it couldn’t have helped to have them distracted as the company struggled to find solid footing.
The best personnel move the company made, according to numerous observers, was hiring former eHarmony President and COO Greg Steiner as its Chief Operating Officer in June 2012. Steiner has been described, nearly unanimously by our sources, as a professional and calming influence on the company. Unfortunately, the move appears to have been too little, too late.
It’s unclear exactly how much of its $73.5 million BeachMint has remaining and what the go-forward plan will be for what remains of the business. It would appear that the company has at least $20 million on hand, but there may be slightly more. We’ve seen in other similar situations, most recently at Viddy, where investors occasionally seek the return of most, but not all remaining capital, and then install new management to take another shot at building a successful business. This would seem unlikely, given the difficult and resource-intensive nature of ecommerce, but we can’t rule it out entirely.
The alternative would seem to be an acquihire (unlikely) or fire sale liquidation. Incidentally, one competitor which would be a natural acquirer tells us that his company has yet to be approached about a transaction of either type. What we can say, is that the majority of BeachMint’s more than 100 employees – a number that has slowly declined from its 2012 high of nearly 150 – will almost certainly be out of a job.
A number of questions remain in this still evolving situation. One of the most pressing for many will be what does this mean for the LA startup ecosystem?
There’s little arguing that LA has made major progress in establishing itself among the top US startup scenes over the last several years. But along the way there have been a few too many high profile flameouts to sleep easy. Again, BeachMint’s unwinding shouldn’t come as too much of a surprise to those paying attention, but the manner and speed with which it’s happening will leave many with whiplash.
There was a time when BeachMint was a poster child for the LA startup scene and those things that it could do better than the Valley – fashion, content, and celebrity integration, among them. The company raised stratospheric financing rounds from Sand Hill Road and Wall Street royalty. To see it meet such an unseemly end is nothing if not discouraging.
But this is the natural way of the startup world. Companies fail all the time. LA has more than filled the void left by the occasional flameout with an equal, if not greater number of promising replacements. The LA ecosystem will be fine and will soon receive an injection of now battle hardened startup talent.
[Image source: LA Times]