Back in 2014, Nasty Gal and Bonobos were on top of the world. Nasty Gal, a vintage eBay shop Sophia Amoruso launched in 2006, had blossomed into an e-commerce powerhouse. It had just expanded into a large office in Los Angeles, staffed by a hundred employees, and was generating $300 million in annual revenues. Bonobos, for its part, gained a loyal following almost immediately after it debuted its derriere-enhancing chinos in 2007. Seven years later, Bonobos was about to sell its millionth pair of pants, making $100 million a year, and readying for a 30 brick-and-mortar store expansion around the country.
Consumers loved these brands, as did the investors who lined up to fund the companies’ growth. Nasty Gal scored $65 million in capital, while Bonobos raked in over $127 million. Each new round of funding was splashed across the business section of newspapers, creating an even brighter halo.
“These companies were raising money at tech valuations, not as apparel business valuations,” says Edward Hertzman, founder and publisher of Sourcing Journal, a trade publication for apparel executives. “This money was poured into consumer acquisition. All they did was acquire, acquire, acquire.”
The success of Bonobos and Nasty Gal prompted a lot of entrepreneurs to try building fashion startups of their own. Andy Dunn, Bonobo’s founder and CEO, literally wrote a manual for them in a blog post about how to build a “digitally native vertical brand” (DNVB). A new flock of fashion brands like Mizzen + Main, Cuyana, M.Gemi, and many others followed this script very carefully.
“We watched these brands explode and we wanted to be just like them,” says Sasha Koehn, who cofounded menswear brand Buck Mason in 2014. “But not anymore.”
GENERATION 1.0 FLAMES OUT
As Koehn observed, things went downhill pretty quickly for Bonobos and Nasty Gal. Amoruso described feeling overwhelmed by the investor pressure that came with the funding she had received. “I didn’t love having eight people reporting to me and asking me over and over if we’re hitting targets,” she told Forbes. After several changes in leadership and a slew of employee lawsuits, Nasty Gal filed for bankruptcy in late 2016. In February of this year, her company was acquired by British retailer Boohoo for $40 million, a fraction of what investors had pumped into it.
Meanwhile, Bonobos had troubles of its own. Dunn tried to hire a new CEO, but she quit after just three months because she felt she couldn’t change the company’s culture. Rumors circulated that the company was struggling to reach the sky-high valuations of its investors. In June of this year, Bonobos was acquired by Walmart for $310 million, a move that surprised many because the two companies could not be more different in terms of their brand or customer bases. “This is not my idea of a dream exit,” Koehn says. “We were expecting them to IPO.”
Bonobos and Nasty Gal are not the only online fashion businesses that have struggled over the last few years. Gilt Groupe, also founded in 2007, sold to Hudson’s Bay Company last year for $250 million, which was less than the $268 million taken from investors. The e-commerce player Fab, founded in 2010, landed $310 million in funding, but sold itself in 2015 to PCH International for an undisclosed sum. It was rumored to be as little as $15 million. Both Gilt and Fab were, at one time, valued at $1 billion each.
In each case, the story is the same. The enormous valuations mean that the brands suddenly had to scale very quickly, which generally means no longer serving the needs of the customer originally drawn to the brand, but creating a blander product and brand experience that will appeal to a much wider segment of the market. Company culture often takes a hit, since it’s hard to properly hire and onboard so many new employees. And quality and design frequently begin to erode.
“The reason the brand was a hit was that it had such a distinct point of view,” says Kaitlyn Nagy, who joined Nasty Gal in 2012 as the head of PR and witnessed the company’s unraveling firsthand. (She has since launched her own firm. ) “After outside resources began putting pressure on changing core values, the brand’s DNA began looking and sounding like too many others that were already out there. The authenticity began lacking and the result was that it no longer stood out.”
All of these recent examples are leading fashion e-commerce startups to rethink their growth strategy.
“How much growth is too much growth?” Buck Mason’s other cofounder, Erik Schnakenberg, asks. “We’re seeing that some of the same brands that get celebrated for raising $10M, or hitting $100M in revenue, are gone a few years later or eek out a distressed sale.”
After watching other companies crash and burn, Schnakenberg and Koehn have shifted their approach. Rather than growing fast, their goal is to grow sustainably. They’re ditching the Nasty Gal and Bonobos playbook, and looking to brands like Patagonia and Eileen Fisher as examples. These days, Buck Mason is not focused on pitching VCs all day long, but is focused on becoming profitable and pouring profits back into the company, much like any other small business would do.
“It’s okay if you’re not a unicorn,” Schnakenberg says. “You can still be a really good company, which can put you on the path to eventually become a great one. It takes time, and we’re okay with that.”