The Samwer brothers may have the last laugh on Fab after all

By Erin Griffith , written on November 26, 2013

From The News Desk

How did Fab fall apart? That's the question the media and the VCs who pumped hundreds of millions of dollars into "the next Amazon" are desperately trying to figure out.

Six months ago, Fab was New York's hottest startup, with almost 700 employees, $336 million in VC backing and a $1 billion valuation. Now, amid multiple rounds of layoffs, high profile executive departures, and missed revenue expectations, Fab has become a startup cliche -- failing to manage its own success.

When a company as high profile, as well-funded, and as ambitious as Fab struggles so suddenly and dramatically, the knives come out. And with Fab's recent meltdown, all fingers have pointed in the same direction: Jason Goldberg, the company's CEO.

There are plenty of reasons cited for Fab's struggles, mostly involving Goldberg: He spent far too much on marketing. He boasted in the press about impossible revenue goals, setting the company up for failure. He hung the company's success on his irreplaceable crazy-tastemaker co-founder, Bradford Shellhammer, and then was unable to manage the crazy.

Some say Goldberg didn't move Fab away from flash sales fast enough. According to others, he pivoted too aggressively from the flash sale business model, which was working.An excellent story in the Verge today paints a picture of a man who was never content, always believing something greater was a pivot away.
But our sources have said that, while all those problems were certainly real, there is one thing more than anything else that landed the company in this position: Over-zealous international expansion.

That's right, the same thing that set Groupon up for disaster is what might now kill Fab. And that's ironic given the two companies approached the challenge from opposite directions.

Like all successful consumer-facing American startups, Groupon and Fab caught the attention of European knock-off artists, the Samwer brothers. The duo's incubator, Rocket Internet, has cloned European versions of Pinterest, Airbnb, Zappos, and eBay with the idea that their startup will be first to the European market.

The Samwers' playbook is to offer the startups they've cloned an ultimatum: Either you acquire our clone for a hefty price tag, or we declare war on you. It's a shameless way to make a living, but it has worked. Groupon acquired the Samwer's clone CityDeal, for example. Others, like Airbnb and Pinterest, have simply ignored the clones.But Goldberg wanted no part of the Samwer's ransom game, and he couldn't resist raising a stink over it. When Rocket Internet launched Bamarang, a Fab clone, he attacked. From his blog:
Let me put bamarang and the other copycats on notice. Ripping someone off is not going to work in this space. Knock-offs are just bad design. Users will see right through it. Such tactics may work in some industries, but not in design. In design, customers are smart and customers value real authenticity. Do something original or don’t do anything at all.
Thus began Fab's aggressive expansion into Europe, not because the company was mature enough for international growth, but because Goldberg wanted to prove the Samwer's wrong. He said good design couldn't be copied, but he wasn't content to let Bamarang fail on its own -- he chased them into Europe before Fab, then a nine-month-old company, was ready. (In fairness, it should be noted that PandoDaily was amongst the media outlets cheering on Goldberg in his fight.)

Goldberg spent money kitting out a five-story office in Berlin, and filling it with 125 to 150 employees. By September 2012, international sales made up 30 percent of Fab's income, Goldberg said. To date, Fab has launched sites in 30 countries.

He didn't stop there: Fab opened a physical retail store in Hamburg with plans to expand into brick-and-mortar commerce. The company also acquired a German custom furniture business called Massivkonzept for $20 million to $30 million.
Fab's most recent round of fundraising outlined plans to expand into China and India. ("China? Where even Amazon has failed?" one potential investor scoffed. "Their economic model wasn't even proven in the US or in Europe.") A Fab spokesperson responded that the company is focused on executing in markets where Fab currently has a presence.

Goldberg gloated when Bamarang finally shuttered its operations in 2012. '“It doesn’t surprise me,” he said at the time. He had fought the copycats and won. From a Businessweek report:

I would say ‘thank you’ to the Samwer brothers for helping us build a business in Europe faster than we would have otherwise.
But now, Fab has laid off 100 employees in its Berlin office and relocated most of those remaining. As Fab pulls back from Europe with tail between legs, it seems the Samwers are getting the last laugh.

The biggest problem with Fab's fast-growing empire was that it cost $5 million to $7 million a month to run.

Where did most of that money go? Marketing. According to a source familiar with the situation, Fab was spending $6 to acquire each new sign-up in March, without including TV ad spending. That cost regularly went as high as $15 per member with TV advertisements. Note, these weren't paying customers -- they were just email addresses. That number is particularly high when you consider that customer conversion rates during Fab's best of times were 3.28 percent. Update: Fab says that figure reflects conversion rates for visitors, and its conversion rate for members is "closer to 15 percent."

Last year Fab spent $40 million on marketing. Goldberg has publicly expressed regret over that figure, and employees say he had internally blamed the reckless marketing spend on CMO Scott Ballantyne, who left the company in March 2012. One former employee says the characterization is unfair, because "Jason always ran marketing, whether or not he had the title of CMO."

When Fab went out to raise its latest round of funding, Goldberg said Fab would spend $50 million on marketing, according to a source familiar with the company. In July, he revised that figure down to $30 million.

Fab's falling Web traffic shows what happens when the company slows its marketing spend: Business Insider cites a 75 percent drop in visits over the past year, which a Fab has countered by saying it has fewer customers, but that they are buying repeatedly. "Fab used to rely on heavy traffic to drive our sales but now, with a large base of customers, it's more about delivering repeatable value to our installed base," Fab's spokesperson said.

People who've seen Fab's books say otherwise. Repurchase rates have dramatically decreased by 80 percent over a 90-day period during the first half of the year, one person familiar with the situation told PandoDaily. Fab's customers have proven to be fickle and therefore less profitable than in the past. Third time repeat buyers numbered almost zero for the first half of the year, the person says. Fab also disputes  that claim, stating that 20 percent of customers within 90 days are repeat buyers and the number is growing. Update: The company also says a quarter of Fab's 2013 customers have made 3 or more purchases.

The good news is Fab realized its mistakes before it was too late. Goldberg has attempted to refocus the company (refounding, he's called it), and his board -- the people who might have fired him over these huge missteps -- continue to express public support. Jeff Jordan of Andreessen Horowitz told Forbes, "[Fab has] a kick-ass CEO committed to bringing it to its full potential."
Fab says it has $120 million in the bank, which should keep it alive for some time, particularly with 200 fewer salaries to pay. But that's a cold comfort when you consider Fab just raised $153 million this summer. That means the company had run through its first $170 million in just two years. Goldberg's wild ambitions and hubris have made him a target, and plenty are celebrating his comeuppance. From the beginning, most people have seen Fab as binary -- either it'll be huge or it'll completely collapse.
But for Fab to make it through its current troubles, Goldberg has to resign himself to finding a middle way. He needs to "refound" Fab as a stable, self-sustaining ecommerce company that can prove its model before it takes on the world.

Disclosure: Fab’s investors include First Round Capital (where Partner Josh Kopelman is a personal investor in PandoDaily), SV Angel (a PandoDaily investor), Menlo Ventures (which invested in Pandodaily via its Talent Fund) and Andreessen Horowitz (where partners Marc Andreessen, Chris Dixon and Jeff Jordan are personal investors in PandoDaily).