Photo Credit: charlene mcbride/Flickr.com

At the height of the popularity of flash sales sites, Fab.com was one of the hottest startups. Investors poured $336 million into it and its valuation skyrocketed to $1 billion. But in the end, it was acquired by PCH International for an estimated $15 million-$50 million.

Fab.com’s Journey

Manhattan-based Fab.com was founded in 2010 by entrepreneur Jason Goldberg who had earlier founded Jobster, chief designer Bradford Shellhammer, Deepa Shah, and Nishith Shah. The site was initially launched as Fabulis, a social networking site for gay men. But in June 2011, the company transformed itself into a flash-sales site for everyday design products. Two months later, it raised $8 million in a Series A round led by Menlo Ventures.

By December 2011, it had 1 million members. It was considered to be growing faster than even Facebook, Twitter, and Groupon and with this milestone, Fab.com managed to raise further funding of $40 million in a Series B round led by Andreessen Horowitz.

A majority of its daily traffic was attracted by its shopping pages integrated with social networking sites such as Facebook and Twitter. Its members could see what their friends liked or bought, and could buy the same products directly through Fab.com.

On its first anniversary in July 2012, Fab.com raised $105 million at a valuation of $600 million in a Series C round led by Atomico. To build traffic to the site, Fab.com discontinued the need for users to sign up. With this, its number of visitors including members surpassed 10 million and it was selling more than four products per minute. It was reportedly on track to earn more than $100 million in revenues in 2012.

In the year 2012 alone, it made six acquisitions including Casacanda for $11 million in stock. In December 2012, Fab.com announced that it would move out of flash sales towards full-priced e-commerce to sell Jewelry and Personal Accessories.

In June 2013, Fab.com raised $150 million in a Series D round led by Itochu Technology Ventures and Tencent Holdings at a valuation of more than $1 billion with a $200+ million revenue run rate. By the end of the year 2013, Fab had grown its base to over 14 million members, but it had started showing signs that it was struggling to maintain momentum. Traffic to Fab’s website and mobile apps peaked at 5,275,000 in November of 2012, just before its pivot away from flash sales and fell 75% to around 1 million within a year.

It then started laying off employees. From a peak of 700 employees, it dropped to just 200 employees in mid-2014. In a memo in October 2013, Goldberg told his employees,

“We spent $200M and we have not proven that we know precisely what customers want to buy. We have north of $100M (cash) and we a) have to make it last b) figure out all the things we should have been figuring out over the last two years.”

Then in June 2014, Fab.com announced its own branded merchandise and even acquired One Nordic Furniture, a Helsinki-based custom-furniture manufacturer. One Nordic was also known as a luxury Ikea with focus on high design wooden and metal furniture. Fab was now talking about taking on Ikea.

In September 2014, Fab.com launched a sister website Hem, which offered customized furniture designs.

Soon after, in March 2015, Fab.com was acquired for $15 million to $50 million in stock by PCH International, which planned to use it as a sales channel for the hardware products it designs and manufactures.

Goldberg shifted to Berlin to focus full time on Hem. He reportedly has about 100 former Fab employees working with him. His backers have reportedly agreed to let him use tens of millions in funding from Fab for the new venture.

Overall, Fab had raised $336 million in investments from Itochu Technology Ventures, SingTel Innov8, Tencent Holdings, DoCoMo Capital, RTP Ventures, Pinnacle Ventures, Andreessen Horowitz, Phenomen Ventures, VTB Capital Investment Management, Atomico, Mayfield Fund, Menlo Ventures, First Round, SoftTech VC, Baroda Ventures, Thrive Capital, BoxGroup, Jon Anderson, Don Baer, Zelkova Ventures, SV Angel, The Washington Post Company, Allen Morgan, and Lars Hinrichs.

Moral of the Story

As we have seen in the case of Gilt Groupe, Nasty Gal, Glam Media, and now Fab.com, investors are getting carried away from fundamentals and have been overfunding these companies with the hope of the large traffic turning into revenue.

Entrepreneurs should realize that pumping huge amounts of venture capital into building audience that cannot be monetized is a very bad business strategy. Fab.com pivoted several times to find the elusive positioning that would result in hyper growth. It just took a couple of years for the company to figure out that this was just a suicide mission.

Heavily funded companies with large audiences acquired through reckless spending and without a sustainable, fundamentally sound business model, eventually die.