Fab's $150 Million Round: Why It's the Beginning of the End

Fab wants to be the next billion-dollar e-commerce business. It's fabulously ambitious--but completely at odds with the company's strengths.

At this point, very little could surprise me about e-commerce wunderkind Fab. Not even its latest news: The company announced Wednesday it just completed raising a $150 million Series D investment round--with another $100 million on the way--at a pre-money valuation of $1 billion. This latest cash infusion brings the total amount of capital raised to $310 million, making Fab the highest-funded e-commerce start-up in the market today.

Fab, in case you didn't know, is a mere two years old. And it's been several different businesses in that short lifespan, including a gay social network and a daily flash sales site. Now it aims to be the "world's design store," hawking fashionable clothes and furnishings. Ambition is something Fab has never lacked.

Naturally, the giant fundraise did raise some eyebrows. Jason Goldberg, the company's CEO ( and ever the prolific blogger), took to his site to play offensive-defense:

He writes:

I want to be really clear on this as I'm sure there are skeptics who will ask and wonder why Fab needs so much money. Fab is focused on the long term. We are focused on creating "Wow!" shopping experiences that will result in customers making 20+ purchases from Fab within a couple of years. We are focused on being the global brand that represents emotional commerce for decades to come...

There are some who will call us a success because of this fundraise.

They'll say we're worth billions.

And, of course, there are some who will call it a bubble.

We know that the truth is that raising money is not success. Raising money is a responsibility that opens up new opportunities. We take our responsibility at Fab very seriously.

Goldberg's right: There are plenty of skeptics.

Jason Del Rey over at AllThingsD summed it up nicely:

The new investment should only lead to more chatter among industry insiders who believe, among other worries, that the company is raising too much money; that it is expanding too fast; that it must have weak margins; or, of course, that it will ultimately be stomped out by Amazon.

To be fair, Fab does boast some nice-looking stats. The company says the site earned $150 million in revenue in 2012, and expects to see that number jump to $250 million by the end of 2013. At the same time, the company has seen its user-base surge to 14 million--up from 5 million members just one year ago. Fab has even won the Crunchie Award for best e-commerce start-up in both 2012 and 2011, for whatever that's worth.

With this latest round of funding, Goldberg spelled out exactly where he wants to take Fab. He writes:

Fab's long term ambition is to be the worldwide leader in Emotional Commerce.

There are currently only four e-commerce companies in the world that are valued at more than $10 billion: Amazon, Alibaba, eBay, and Rakuten. We believe that Fab has a legitimate chance to be the fifth by leading in Emotional Commerce.

I'm just not sold.

One of the main criticisms lobbed at Goldberg is that Fab's unit economics don't make sense--that margins for flashy design products can never be high enough to justify the insane overhead of scaling globally. Goldberg's response, which he addressed Wednesday in an interview with Business Insider, is that Fab's margins are 43 percent--"whereas Amazon's are in the single digits."

Goldberg's right here, but he failes to address a more fundamental--if not philosophical--problem.

The bigger issue, and one that you don't see Goldberg address often, is how scaling this quickly will affect the core value of Fab's brand.

The Problem With Going Big

Here's the conundrum for Goldberg: Fab's initial success was due in large part because it was able to find and curate unique designs, from unique designers. And by doing so, the company established a hardcore following among aesthetes who cared about surrounding themselves with good, hard-to-find design. According to Goldberg, repeat buyers make up 67 percent of all Fab sales. People who care about design really care about design, apparently.

But as Fab pushes more and more mainstream--and continues to grow overseas--it will be forced to expand its selection of products, which will inevitably dilute the brand's cool-factor--the characteristic that made Fab so valuable to its customers in the first place.

In other word's, Fab's best feature is its discriminating taste--or as Sarah Lacy put it, "co-founders Jason Goldberg and Bradford Shellhammer are essentially magazine editors masquerading as etailers. Day-after-day, they are designing a gorgeous, aspirational life for you one item at a time."

That will become an increasingly difficult goal as Fab seeks global e-commerce domination. The founders may find themselves forced to push products that don't necessarily fall under "great design" in order to continue expanding their user base.

Trouble may already be brewing to some extent. The chart below, pulled from Alexa.com, shows Fab.com's traffic ranking taking a pretty steady downward slope since late 2012.

According to his post, Goldberg says Fab is now working with 15,000 designers-- up from 5,000 just one year ago. If that scale continues, it stands to reason that Fab might just one day become another commodity e-tailer, competing with Amazon, Walmart, and Target. That's not a good option. Even now that Fab is producing products in-house, it'll be a Herculean task--and take a whole lot more capital--to put the brand in a position to compete with the big boxes.

A Familiar Story

Some have compared Fab's growth to Groupon, but I think a better analogy is actually Etsy.

Two years ago, Inc. ran a magazine feature about crafty e-commerce site, wondering if the then-CEO, Rob Kalin, would be able to scale the site into the massive business he envisioned. Writer Max Chafkin wrote:

For Kalin and his investors, the questions are even tougher: Can a site dedicated to DIY scale? Or is Etsy, despite Kalin's ambition and grandiosity, just a small idea?

The two businesses aren't that different. Kalin is banking on the idea that DIY is ready to go mainstream. Goldberg believes that mainstream folk genuinely care about great design in their homes and closets. He says consumers are increasingly interested in making thoughtful purchases, which he refers to as " emotional commerce."

Maybe he's right, but it'll be a massive challenge for Goldberg to a) keep the integrity of the brand intact while onboarding thousands of new products, and b) convince a global consumer base to start caring more about design and, moreover, to make those purchases online.

I'll end on a chart. For Fab to become the mainstream, global brand that Goldberg believes it can become, it'll have plenty of challenges reaching new demographics and new markets. And if it wants to compete with the big boys of e-commerce, it has plenty of work ahead. For a snapshot at just how much work, see below.

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