Death By Overfunding - Nasty Gal

Over the past decade, online clothing sales have ballooned and Nasty Gal and its founder Sophia Amoruso had managed to build a big brand and fan following among millennials. However, the company filed for chapter 11 bankruptcy in November 2016. 

Nasty Gal’s Beginnings

Los Angeles-based Nasty Gal was founded in 2006 when a community college dropout Sophia Amoruso started selling a highly curated selection of vintage clothing on an eBay page. Within five years of inception, it became one of the leading international sites for new and vintage clothing, shoes, and accessories.

The online store gained low-priced inventory by finding designer products from places such as Salvation Army stores. A Chanel jacket that she bought for $8 at one such store sold for $1000. She styled, photographed, captioned, and shipped the products herself for the goods she sold.

By 2015, Nasty Gal was estimated to have 2.3 million Instagram fans and 1.3 million Facebook fans. It had over 37,000 likes a day on its social media posts. According to Marketwatch, about 42% of its active social media following is in the 25 to 34-year-old category. In 2015, the company did $300 million in sales.

Nasty Gal’s Woes

After it gained popularity, Nasty Gal was not able to source all its inventory from low-priced stores and started sourcing its products from Los Angeles-based vendors who sell vintage-inspired products. It also started producing its own private label clothes. That was a wise strategy that offered much better margins, and given its knowledge of a large customer base, it could have managed design and inventory effectively, by producing collections and sizes to fit its audience.

However in 2014, in a highly debatable move, it opened two brick-and-mortar stores in Los Angeles. Soon, Nasty Gal was facing increased competition and higher costs. It had to lay off about 10% of its workforce of 280 people that year.

It was also plagued with lawsuits for copyright infringement and allegedly firing employees for being pregnant. In 2011, it was a co-defendant in a lawsuit filed by the Hells Angels for trademark infringement. In 2014, Jamies Spinello sued it for copying one of her necklace designs. In 2016, Pamela Love sued it for copying three jewelry designs.

In January 2015, Sophia stepped down as the CEO and promoted the company’s president Sheree Waterson to the CEO post. In her blog, Sophia says that she was pondering over this move for over two years. She had been wondering if the CEO role is one that she wanted – and the one that she is best at. She stayed on as executive chairman and headed Creative and Brand Marketing.

Nasty Gal’s Funding

Nasty Gal was built organically for quite some time. In 2011, before it raised money, it had revenue of $28 million and 150,000 customers, 200,000 Facebook fans, 30,000 Twitter followers, and 50,000 Instagram followers. A tremendous achievement for a young entrepreneur in her twenties.

It received funding of $9 million in March 2012 and $40 million in August 2012 from Index Ventures and then $16 million from Ron Johnson in February 2015.

Nasty Gal was doing well in its niche of vintage clothing and was able to connect well with a niche audience. And the Internet and social media provided a great opportunity to find this audience. However, as Lawrence Lenihan, managing director of FirstMark Capital pointed out,

“We are ruining potentially wonderful companies out of sheer ignorance of the fashion industry and a lack of understanding of how technology will impact it. We are overcapitalising companies and forcing unnatural, unsupported expansion.”

I agree. Investors are overfunding these niche companies and forcing them to grow too rapidly at an unsustainable level. As in the case of Nasty Gal, this has destroyed the very fibre of its success. Not everybody can be a Facebook, Google, or Amazon. For most companies, capital efficiency and a sharp focus on fundamentals and unit economics is very critical.

UK online retailer Boohoo is bidding $20 million for Nasty Gal. Boohoo targets teen and young female customers and is looking to expand to the US with this acquisition. For its fiscal year ending February 2016, Nasty Gal made a net loss of $21 million on revenues of $77.1 million, indicating that the company has been on a downward spiral for a couple of years.

Nasty Gal, today, should be a thriving company if they hadn’t been caught up in the venture capital financed hyper growth mode. Steadily, Nast Gal could have grown to over $100 million in profitable revenue with no VC money at all.

Nasty Gal had no business going out of business! A real shame.

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Photo credit: Joseph Brent/Flickr.com.