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The key reasons why Fab.com will be remembered as one of the greatest failures in startup history can be synthesized by Goldberg\u2019s inability to align his operating model with his business model. The company expanded its operations into Europe too quickly, before having a proven business model in the United States. \u00a0Then it changed its business model into an e-commerce website and abandoned its flash-sale business model. High\u00a0inventory and marketing costs, \u00a0and no\u00a0good insights of customer preferences made it burn $200M in only two years, without in the end having a proven business or operating model.<\/p>\n
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Fab\u2019s operating model<\/strong><\/p>\n Initial operating model – no inventory, few employees, flexible operations:<\/strong>\u00a0Initially,Fab used a flash-sales model, allowing e-commerce companies to sell a limited amount of inventory quickly at a discounted price on its website.1<\/sup> This allowed the company to be flexible in its choice of designers and have low initial costs, because it did not have to hold inventory. The availability of unique products over a short amount of time made the company grow exponentially. Shellhammer curated the flash sales himself, allowing for low labor costs and immediate customer response.<\/p>\n First operational mistake – scaling too quickly:<\/strong>\u00a0Due to Fab’s success, Rocket internet launched a similar website in Germany. Feeling threatened, Goldberg decided to quickly expand in Europe\u00a0by acquiring three startups and hiring around 100 employees. While the acquisition costs were not disclosed, Fab entered a long-term lease and hired ~100 employees in Europe. Goldberg\u00a0quickly ran into huge problems in streamlining the businesses worldwide, and clear operating processes were never set up.\u00a0The company experienced shipping delays, as well as dissatisfied customers. The European employees were never aligned with the U.S. headquarters and the European branch never became profitable.<\/p>\n Next mistake – exponentially increasing the company’s scope through increased inventory and shift in the operating model:<\/strong> At home, Goldberg decided\u00a0that the path to growth lies in increasing customer satisfaction by decreasing the shipping time from ~16 days to ~6 days. This was only possible by holding inventory and not relying on designers any more.[3]<\/a> It purchased a warehouse and increased its number of SKUs from 1,000 to 11,000 in only a few months in 2011.[1]<\/a> \u00a0<\/sup>The company quickly ran into problems, because now it had to buy products it thought consumers would buy without solid consumer data.[4]<\/a> This increased inventory costs and unsold inventory, without a corresponding increase in sales. Employees remember that “piles of inventory remained in the warehouses.\u201d[3]<\/a>\u00a0 Fab now had to feature\u00a0outdated products\u00a0on its website. At the same time, Goldberg hired over 600 employees, dealing with inefficiencies and confusion in day-to-day operations.\u00a0By changing the operating model, Goldberg changed the user experience and alienated its customers.<\/p>\n <\/p>\n Fab\u2019s business model<\/strong><\/p>\n Initial business model – designer focus:<\/strong> After its failure, many critics said that Fab\u2019s business model did not hold. I believe it did, but it wasn\u2019t scalable at the pace at which Goldberg wanted it to be. \u00a0Fab was in the business of connecting unique designers to consumers in the form of flash sales. Fab\u2019s initial revenues came from commissions from the designers. The company was focused on mobile sales (with 35% of sales coming from mobile devices) and on selling unique products, with 90% of its products not found on Amazon. It had 10 million members and $100M sales by 2012.2<\/sup> \u00a0\u00a0\u00a0\u00a0<\/sup><\/p>\n The fatal\u00a0move into becoming the new Amazon:<\/strong> Fab’s initial growth and its valuation to $900M determined Goldberg to pursue\u00a0ambitious sales goals of $250M in 2012, which could not be achieved by the flash sale business model alone. Despite the initial alarm bells regarding his decision to carry inventory, Goldberg decided he wanted Fab to become the next Amazon and shift away from its initial business model of flash sales, in order to grow quicker. This did not correspond to his business model, and consumers started not recognizing Fab\u2019s initial value proposition any more, since Fab now sold products that they could purchase cheaper and get delivered faster on sites such as Amazon. Thus, Fab had to increase its marketing spend dramatically to keep growing its user base. Fab had to spend $40 million on marketing in 2012[5]<\/a> to fuel its consumer growth and transition into e-commerce. When they ran into financial problems and couldn\u2019t justify the spending any more, the consumer numbers dropped radically.[6]<\/a><\/a><\/p>\n Goldberg claims that gross margins were 43% and contribution margins were 20% initially\u00a0[3]<\/a><\/span>, but these were quickly eroded by personnel and marketing costs. By the end of \u00a02014, Fab was left with 100 employees. Its European operations had shut down completely and burnt\u00a0between $60-100M.[7]<\/a><\/p>\n Fab failed because it expanded operations too quickly,[8]<\/a>\u00a0and decided to carry inventory even if it did not have the capabilities or \u00a0customer insights to support this decision. Goldberg was focused on sales growth and did not pay attention to operations. It many ways, Goldberg\u2019s failure could have been avoided if he had paid a bit more attention in (GSB\u2019s version of) TOM.<\/p>\n <\/p>\n <\/p>\n [1]<\/a> Business Insider: http:\/\/www.businessinsider.com\/how-billion-dollar-startup-fab-died-2015-2<\/p>\n [2]<\/a> Bloomberg: http:\/\/www.bloomberg.com\/news\/articles\/2015-03-03\/fab-com-is-sold-in-billion-dollar-darling-s-spectacular-rise-and-fall<\/p>\n [3]<\/a>Business Insider: http:\/\/www.businessinsider.com\/rise-and-fall-of-fab-2014-5<\/p>\n [4]<\/a> Bloomberg: http:\/\/www.bloomberg.com\/news\/articles\/2015-03-03\/fab-com-is-sold-in-billion-dollar-darling-s-spectacular-rise-and-fall<\/p>\n [5]<\/a> Fortune: http:\/\/fortune.com\/2015\/01\/22\/fab-billion-dollar-valuation\/<\/p>\n [6]<\/a> http:\/\/www.businessinsider.com\/rise-and-fall-of-fab-2014-5<\/p>\n [7]<\/a> Inc.com: http:\/\/www.inc.com\/issie-lapowsky\/jason-goldberg-what-went-wrong.html<\/p>\n![\"tech_fab13__04inline__605\"](\"https:\/\/i4tsk12in2b2y7uts14c528g-wpengine.netdna-ssl.com\/wp-content\/uploads\/sites\/4\/2015\/12\/tech_fab13__04inline__605-300x179.jpg\")
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