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We all know that a business needs money in order to grow and thrive. While this is (mostly) true, I always advise my start-up clients to think twice before they accept any funding. I know, it sounds crazy, and I’ve been on the receiving-end of several dear-in-headlights stares when I say it, but hear me out!
If an investor comes to you and offers to put money into your company, you know that you’ve reached a pivotal stage in your company's growth. Not every company is fortunate enough to pique the interest of investors so I also know that it seems completely counter-intuitive to turn that money away. However, believe me when I say that this money will not always be the means to your desired end!
Nasty Gal is a textbook example of this point. I want to preface this by saying that I am a fan of Nasty Gal, I am sincerely saddened by their situation and I am really hoping that they pull through. That said, if at least one startup or emerging enterprise takes something away from this situation, Nasty Gal’s downfall would not have been completely in vain.
The company was a niche-online retailer that purchased vintage clothing at local thrift shops for deep discounts and re-sold them at insane margins. For several years, they averaged about $28MM in annual sales. Fast forward to 2011 - the VC investors came in (looking for a home-run company) and pumped $65MM of capital into the company. Doesn’t seem so bad, right? The company made $28MM as is, that money could definitely help them make significantly more.
But now that they had all this cash, they couldn’t possibly stick to their guns and continue to grow organically. There was way too much at stake - their investors expected them to take that $65MM and double or triple it! They didn’t have the time to sit around and source individual one-of-a-kind, vintage pieces anymore. Instead, they began purchasing vintage-inspired clothing from local retailers (thus decreasing their margins) and then went on to produce their own line of clothing (better margins, but subjected them to a number of copyright infringement suits). Then, in a time when brick and mortar retailers were closing up shop because they could no longer compete with online retailers, Nasty Gal decided it would be a good idea to open up not one, but two, physical locations.
Despite the aforementioned “hiccups”, Nasty Gal’s revenue significantly increased for a couple of years, but needless to say, the story doesn’t end all that well for the company. The company was no longer the unique fashion business it once was. They were now competing with hundreds of copycat websites who were selling similar items, sometimes even at a fraction of the cost.
Last year Nasty Gal operated at a loss and the company is currently in bankruptcy. Not all is lost though! For now, the company is continuing to operate and English retailer, BooHoo (a direct competitor), is seeking to buy Nasty Gal out of bankruptcy (for the bargain-basement price of $20MM). Perhaps, in the right hands, Nasty Gal can rise out of the Chapter 11 ashes and become the fashion powerhouse it once was.
Moral of the story? Not all money is good money, especially if the people holding the purse-strings are going to influence what you’re supposed to do with that money. Don’t get me wrong, these investors are business geniuses! But, that said, if you’re in a niche business, no business genius is going to know your company and your clients better than you!
This business genius agrees. Note: Mr. Lenihan discusses fashion companies, but I am willing to wager that his logic is applicable to any niche-market, non-tech enterprise.