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Demolition Man: why does Fab's CEO keep building big companies that suddenly implode?

Demolition Man why does Fab s CEO keep building big companies that suddenly implode The Verge


If you ask employees when they started to notice that something was wrong at Fab, they will usually mention the bike locks. The bright orange locks appeared suddenly, affixed to the office doors of senior executives. “This was a company that prided itself on openness,” says one former staffer. “You could go in and talk with the founders about anything. And then suddenly it felt like they didn’t even trust us not to steal off their desks.”

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Is Fab officially done for?

Fab's bleeding resembles Groupon's:

What went wrong:

Prior to these change in strategy, Fab was focused on growth over profit. The company raked in $115 million in sales in 2012, but while its top-line revenue was growing massively, so were expenses.

To increase brand awareness for its flash-sales model, the company had taken on high customer acquisition costs. Howard Morgan, a partner at First Round Capital, a firm that invested in Fab, told The Wall Street Journal, "We had a great group of customers who bought a lot and other customers who came once for a sale yet they were not long term profitable," he says. "We were paying a lot to get them, but they were not profitable."

These costs, plus other advertising channels, bloated Fab's marketing budget to $40 million, or 35 percent of revenue, in 2012, a figure Goldberg has said he wished was $10 million less.

Fab's buying spree hasn't helped decrease costs. The company has scooped up Indian tech- company True Sparrow Systems, designer marketplace FashionStake, German daily-deal site Casadanda, UK design-store Llustre and most recently German custom-furniture store MassivKonzept.

Related: Online Startup Fab Sued for Copyright Infringement, 'Unfair' Competition

Plus, running a strictly daily-deals site is logistically tough and takes resources -- everything from uploading inventory, determining shipping and return strategy, having customer service in place, writing content and perfecting images.

"Just the nature of the flash-sale business is that basically every single day you're opening a new store with hundreds, if not thousands, of products," Goldberg told AllThingsD earlier this year.

This can start to eat at a company's revenue. Fab was seeing 29 percent gross margins in 2011 (presently they are at 43 percent). Something had to give: The company needed to trim the fat and put more of a focus on narrow and deep, not wide and shallow.

"To get profitable while providing our customers with benefits like exclusive merchandise, free shipping, free returns, and low prices, we can't just grow revenue. We also have to carefully manage our costs," Goldberg told employees in an internal memo.

Was Fab's fall inevitable?

From where Fab started and where it is today, this possibly was the only route it could have gone to become a household name.

When Goldberg and Shellhamer launched Fab in 2010, the pair had originally set out to create a gay men's social network, known as Fabulis. After a year of seeing little traction and having blown $2 million in investor money, the duo decided to pivot to a daily-deals site. 

Unclear they're dead. Perhaps they can recover, like Groupon has been doing.

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