
How Nasty Gal Went from an $85M Company to Bankruptcy - prostoalex
http://news.morningstar.com/all/dow-jones/us-markets/201702243741/how-nasty-gal-went-from-an-85-million-company-to-bankruptcy.aspx
======
mikikian
To learn about the facts leading up to the bankruptcy, a great resource is to
read the declaration in support of the first day motions. This is filed under
penalty of perjury so there is a reasonable expectation it is factually
accurate. From the filing, here are the financial details [1]:

"For the year ended January 31, 2015, the Debtor reported revenues of
approximately $85.0 million, gross profit of approximately $34.0 million and
EBITDA of negative $6.3 million. For the year ended January 30, 2016, the
Debtor reported net revenues of approximately $77.1 million, gross profit of
approximately $22.8 million and EBITDA of negative $15.4 million. Through
August, 2016, the Debtor has reported revenue of approximately $41.1 million,
gross profit of approximately $17.7 million and EBITDA of negative $3.3
million.

The Debtor projects that, for the year ending January 27, 2017, it will
generate net revenue of $77.0 million, gross profit of $33.3 million and
EBITDA of negative $1.4 million."

[1]
[https://pdf.inforuptcy.com/pacer/cacbke/1768567/dockets/4/1-...](https://pdf.inforuptcy.com/pacer/cacbke/1768567/dockets/4/1-0CEFEDFC-A784-11E6-A1AC-5C0F1EE103D7)

~~~
novaleaf
thanks for those details. For those like me who didn't know:

EBITDA = Earnings before interest, tax, depreciation and amortization

~~~
rhizome
Which in practice means "revenues are lower than we're saying, and
losses/outflows/overhead are larger."

------
moomin
I'll pick out a thread here: the toxic culture. When businesses fail, it's
regarded as obvious that the toxic culture contributed to the downfall. With
successful businesses like Uber or some bank you recently read about, it's
assumed that somehow these behaviours are what makes the companies profitable.

My own theory is that toxic culture is a drain on every company with one, like
a parasite on a host organism. Sometimes the host is strong enough to survive,
sometimes it isn't.

I've worked for toxic tech and toxic finance companies. In both cases I felt
that poor decisions were made that a healthier culture could have avoided.

~~~
taytus
I don't disagree with your analysis, but can we stop calling uber a successful
business? It has been probed countless times that they are bleeding money and
still is not clear if they will ever be successful.

~~~
trome
Yeah, as of yet Uber is not able to turn a profit, and is surviving on massive
subsidies. Short of self driving cars, this is unlikely to change.

------
raiyu
It looks like overall a classic mistake of trying to go too fast too soon.

The issue with taking on VC capital is that you need to be in control of how
you spend that money, and if you don't need it, then don't take it.

There are also challenges with any business in crossing the chasm. Selling to
more customers, or a different set of customers is akin to searching for
product market fit a second time and is tricky like the first.

The underlying business fundamentals are also critical.

A great example of a company taking on VC money but growing slowly and
methodically is Github. They raised their Series A well after they had
established significant revenue and were already profitable for many years.

Though they did get into an extravagent office that was largely unnecessary
but they used the extra funds to double down on their own infrastructure and
to expand github into the Enterprise. This shift to the enterprise was about
finding product market fit with a different set of customers and also about
updating the company culture.

But luckily they had revenue, profit, and great advisors to hep them navigate
the turbulent waters which allowed them to grow but not crumble under their
own weight.

It looks like Nasty Gal just did too many things at once. Moving to
manufacturing, warehousing, retail brick and mortar stores, staffing up the
company with senior hires that probably weren't a culture and product fit.

One of these errors is costly enough but taken together we now see the
results.

Had they instead grown more organically, focused on what was working and
double down they could have taken on significantly less money, continued to
grow, and still be in business today.

But of course all analysis is easy from the sidelines and the inside story is
rarely told.

None the less for a business to be bootstrapped and survive so many years it
had to be profitable, then you take on VC money and it falls apart the overall
theme is clear.

That's not an indictment on VC money either, because Google, Facebook, Snap,
Twitter, Apple, all wouldn't be here without it.

~~~
narrowrail
I hope it doesn't sound too pedantic, but the 'C' in VC stands for capital, so
saying money or capital after VC is redundant. The only reason I was driven to
write this is because of how many times it was written.

~~~
adventured
That's not necessarily correct.

When the parent writes:

> A great example of a company taking on VC money

VC can stand for "venture capitalist" in that context. So "VC money" equating
to venture capitalist money, would in fact be a proper use.

Further, venture capital is a specific type of money. One could also correctly
say: bond money, debt money, home equity money, (the) bank loan money, among
others and they act as an elaboration of the type of money in question as all
context of money is not the same. If I say: the bank loan, that's not
necessarily the same as: the bank loan money. The same can be true for venture
capital. If I say: the venture capital (eg: we need to discuss the venture
capital situation), it can mean the broader arrangement (such as the VC terms)
or situation of fund raising, rather than being about the venture capital cash
specifically.

~~~
narrowrail
I just happen to disagree, and I believe when one says I took VC that means 'I
took venture capital', not 'I took venture capitalist money.' There is a wiki
entry[0] for VC, and when referring to venture capitalists it is spelled out,
not abbreviated VC.

[0][https://en.wikipedia.org/wiki/Venture_capital](https://en.wikipedia.org/wiki/Venture_capital)

~~~
sirclueless
"I took VC" probably parses out to "I took venture capital" in this same
context, but it's a strange phrase and less common than "I took VC money."

I think this is because "VC" is only one type of investment, and for other
similar forms of investment the phrase is nonsensical. For example, PE means
"Private Equity" but you can't say "I took PE." (Equity means ownership, and
taking money from an investor means giving up ownership, not taking it.) "I
took VC" is basically abusing the dual meaning of "Capital" as the thing an
investor provides in exchange for equity and the thing a business uses to
operate.

~~~
narrowrail
I like your explanation the best and I actually dislike the abundant use of
acronyms. It seems use of acronyms on HN is often a kind of signaling rather
than a convenience.

------
headmelted
The most interesting part of this to me is the purchase by Boohoo.com, itself
capitalising on legendary dotcom failure boo.com's branding.

It sounds very much like the parent is running a business model very similar
to the "one last draw" model Warren Buffet was so successful with earlier in
his career.

It might make a lot of sense for the right type of investor, too. The growth
won't likely be there in the long term (minus an unlikely resurgence), but
revenue will come early, meaning a fast if limited return.

I'd be interested to know what kind of revenue Nasty Gal is doing now,
obviously it's not anything like $85m on a price of $20m.

~~~
alaskamiller
Revenue is vanity. Profit is reality.

Selling $85MM in 2014 is nifty, but fashion industry is hard. Average EBITA is
maybe 10%: [http://www.mckinsey.com/industries/retail/our-
insights/the-s...](http://www.mckinsey.com/industries/retail/our-insights/the-
state-of-fashion) to realize how brutal it is.

Let's piece this together...

She had 280 FTE at 2013 and got into a lease for 500k sqft warehouse:
[http://www.inc.com/30under30/donna-fenn/nasty-gal-sophia-
amo...](http://www.inc.com/30under30/donna-fenn/nasty-gal-sophia-
amoruso-2013.html)

At ~$60k/yr avg and we'll pretend a killer deal on the space at ~$30/sqft,
half off the avg ask that year in KY
[http://www.loopnet.com/Louisville_Kentucky_Market-
Trends](http://www.loopnet.com/Louisville_Kentucky_Market-Trends), her bill
was probably $31.8MM.

She also got into manufacturing. And with how much she was willing to spend, I
would imagine she threw maybe $1MM here and $1MM there for that. Probably
another few millions on the two B&M.

Boom, that's $40MM gone, just like that.

Smart VCs don't invest in ecommerce. The investors bought into Sophia
Amoruso's narrative. The second she took the money she had to spend the money
so can't blame her for that.

That warehouse must have been albatross around the neck. She thought they
could repeat the $85MM high score but clearly that didn't happen; they never
mentioned revenue numbers ever again.

Next year she asked for another $24MM, prob to cover for the lease and half
the head count. But again, another bad year.

All the while she got distracted writing her vanity book, going on her vanity
tour, rationalizing what's good for her must be good for the brand.

So 3 years in they lost $64MM just like that chasing after the dragon.

Crazy ride.

Who's got next?

~~~
IsaacL
Revenue is often used as a vanity metric. On the other hand... revenue is
tangible, profit is an accounting construct.

~~~
grzm
Would you elaborate? It seems the pile of money you have after paying expenses
is tangible in the same way as the pile of money you receive.

~~~
cookiecaper
Revenue is absolute. Money either came in or it didn't. Profit is fungible
because the accountants and business principals decide what counts as a cost
and what counts as a surplus.

An infamous example of this is "Hollywood accounting" [0], whereby major
studios spin off independent LLCs for each film project they pursue, charge
these LLCs exorbitant fees for marketing, distribution, etc., and then the
LLCs never post a profit. As I understand it, such structures have been used
on some of the most successful film franchises of all time, including _Lord of
the Rings_ and _Harry Potter_. This tactic is commonly believed to be a
mechanism to avoid paying royalties.

[0]
[https://en.wikipedia.org/wiki/Hollywood_accounting](https://en.wikipedia.org/wiki/Hollywood_accounting)

~~~
portent
> Revenue is absolute. Money either came in or it didn't.

Sadly nothing is that absolute. Plenty of revenue scandals out there.

A typical example of this: a large supermarket hasn't made enough money for
the year, and asks its suppliers to book future sales that (very likely) will
come next year as real sales now. The suppliers do this, and actually pay up,
because they want to stay on good terms with the big supermarket. So the
supermarket has the "absolute revenue" now, but has a hidden liability behind
it.

It's not theoretical:

[http://www.bbc.co.uk/news/business-37536538](http://www.bbc.co.uk/news/business-37536538)

"Auditors found that the inflated profit figure was the result of Tesco
booking payments from suppliers before the company had been due the money."

~~~
tarr11
How do supermarkets get payments from suppliers?

I thought they got paid by customers and they paid suppliers.

~~~
Scoundreller
Shelf space, warehouse space, priority placements. The modern supermarket is
like Amazon: anyone can get space, if they pay the price and hit sales
numbers.

------
firasd
Oh snap, I didn't expect this headline sentence to end this way. It was so
lauded in the media for a while. Good PR.

(File under sama's warning about founders falling in love with personal press?
[http://blog.samaltman.com/the-post-yc-slump](http://blog.samaltman.com/the-
post-yc-slump))

------
spaceflunky
I was very close to insiders at the company, can't tell you who I know, but
you'll have to trust me. Nasty Gal was a lot worse of an environment that this
article leads on. There's a lesson to learn here, so that's why I'm posting.

Basically, Nasty Gal made a string of horrible investments, one after another,
which makes one wonder if they were trying to fail. Lots went wrong, but I'll
cover the stuff that hasn't been reported.... First they tried to raise their
average price point from $60 to like $400. They started off selling cheap crap
from asia (think F21), but then when Sheree Waterson from Lululemon came
onboard, she convinced Sophia they could follow the Lululemon model and charge
insane prices for clothes. (Keep in mind Waterson was a failed exec from
Lululemon that joined NG after being fired from Lululemon so she had her own
issues) That idea failed and NG alienated customers, while also having a lot
of inventory they could sell on hand. Huge loss of capital on that idea.

Second, Sophia Amoruso became increasingly obsessed with building a "cult of
personality" around herself and using that to sell clothes. Amoruso would
regularly commandeer NG's customer mailing list to send out mailers about
herself and what she was up to. These emails would result in the highest
unsubscribe rates. NG, like a lot of online retailers, lived and died by their
weekly emails. Then she decided she had to write a book, so she spent around
$500,000 of company money on a ghost writer and marketing for the book. She
had a publisher, but the publisher only picked her up because Amoruso was
paying all the costs to publish out of the NG's pocket. Amoruso, again use the
company mailing list to promote the book, which resulted in a lot of unsubs.

Amoruso basically bet that women would buy her clothes if they identified with
her story, so she doubled down on building her cult of personality and
plastered her face and story all over Nasty Gal. There was some degree of
success for Amoruso in the form of fame, but this did NOT result in an
increase of sales to the company. Essentially, Amoruso traded company revenue,
for personal fame.

Thirdly, there were frequent and arbitrary layoffs at NG which killed moral.
If Amoruso didn't like a how a project was going, she would fire the whole
team. This lead to lawsuits and Nasty Gal has had deal with at least 5-10
different plaintiffs claiming wrongful termination. Many of these settled out
of court for a good sum of money. Some of the fired women were pregnant and
they accused Amoruso of firing them for actually being pregnant. They had
enough of a claim that Amoruso had to settle with them out of court.

Fourthly, going back to Amoruso's vanity... She became obsessed with building
a lavash office in downtown Los Angeles. She spent about $10-20M on a
beautiful, but very expensive office. This came back to bite them later.

Lastly, Nasty Gal was continuing to generate money, about $70M a year
according the bankruptcy docs, but they were still losing money on that. They
still had a big email list that they built up years prior, so that kept them
selling. They had to take out what basically amounted to a 'shark loan' from
Hercules Capital to stay afloat. About $10MM in 2014. After they failed to
right the ship, Hercules basically forced them into bankruptcy and that's why
they are where they are now.

~~~
edshiro
Thank you for the insights into the company. I don't know whether this is
common in VC backed companies, but I am surprised at the lack of governance
around spending of company money for personal gain. 500K on a ghostwriter when
you are trying to steady the ship and then make it move full steam ahead??!
That sounds insane and if I were an investor I'd kick that CEO's ass.

Moreover, very surprised Index Ventures poured $40M into this company. What
were the reasons that motivated such a sizeable investment?

~~~
spaceflunky
The unique thing about NG was that between 2010-2011 they had explosive growth
and high profit margins selling the cheap clothes they were buying from
commodity asian vendors. The real secret sauce to NG's success was that the
first couple of employees were expert buyers and knew how to spot profitable
trends. Keep in mind Amoruso only knew how to buy and sell vintage. It was
only after Amorus hired her first employees that NG began to resale higher
margin new clothing.

When Index Ventures came along NG was profitable and their growth was
impressive, therefore NG negotiated very favorable terms since they were well
in the black. That said, Index was the only VC firm willing to make that
investment. No other firms participated. Later on, all other venture capital
NG received was in the form of very high interest, high risk loans.

The problem was that when Amoruso got the money, she mismanaged that power and
made horrible investments (she also pocked a lot of the investment from Index,
buying a $5MM home, Porsches, and other luxury goods). She tried to shift away
from what had made NG money in the first place, to high-risk vanity projects.

~~~
Asparagirl
I read her book, and if I remember correctly, she claims she had turned down a
lot of VC's swarming to get a piece of the company. There was the anecdote
about the VC who called and left a rambling message on her phone and later
said he had been so high partying that he didn't remember it, or something
like that? The implication was that a few of the nerdy-preppy SV VC's were
hilariously pretending they were party animal nasty boys to try to get a piece
of the Nasty Gal deal.

~~~
spaceflunky
Complete fiction. Most of that book is her posturing about how great she
thinks she is. See statements about cult of personality.

~~~
Asparagirl
I appreciate your taking the time to reply here. Working for toxic, crazy
bosses is the worst. Unfortunately, I too speak from experience...

------
jmcgough
I saw several small fashion startups pop up in the bay area after Nasty Gal
got big revenue numbers. They all were obsessively trying to replicate them
and chase after their success (even to the point of copying Amoruso's way of
writing and NG's edgy image). I have a feeling we'll see a few less copycats
now.

In unrelated news, Nasty Gal seems to be running a 70% off everything sale
right now to dump inventory.

------
PaulHoule
The clothes were awful. It sounded like a good story from a distance, but if
you looked at the catalog it was a definite maybe and if you saw the clothes
in person you realized they used cheap materials and were photographed from
the good angle.

~~~
IsaacL
One HN user wrote about why she liked them in a previous thread on Nasty Gal:

[https://news.ycombinator.com/item?id=12923367](https://news.ycombinator.com/item?id=12923367)

~~~
narrowrail
This is a very interesting read for perspective, thanks.

If you're like me and wear pretty much the same thing everyday bought from
thrift stores (excepting underwear), it can really open your eyes. Women do,
generally speaking, all look better than men. I probably spend too much on
outerware, but I save on clothes because I just don't care.

As an anecdote, one of the baristas at my coffee shop said a ski pass at our
closest resort (I'm in the Rockies) was too expensive while wearing, what I
thought to be, fancy clothes. After 9 months of interaction, I've concluded
her clothes budget would cover 3 ski passes. My parents taught me to value
experiences over material goods, and I'm very thankful for that.

------
nutanc
The nastygal google ads are pointing to
[http://localhost/error.html](http://localhost/error.html) Is this common?
They are out of ad money and Google will not charge if pointed to localhost?

~~~
cm2012
Google charges regardless of URL. This is just a mistake.

~~~
coleca
My experience has been that Google rejects ads that don't have a valid URL. We
got all kinds of warnings about potentially having our Adwords account banned
if we didn't fix a typo in a URL in one of our ads.

------
socrates1998
Isn't this the same girl that the Deniro/Anne Hathaway movie was on?

After reading the article, this movie version had the same issues as this real
life founder.

If only she had watched the movie about herself maybe she wouldn't have
bankrupted herself.

------
zelias
Anyone else notice how everyone they reached out to refused to comment?

------
jagtodeath
No pay wall

[http://news.morningstar.com/all/dow-jones/us-
markets/2017022...](http://news.morningstar.com/all/dow-jones/us-
markets/201702243741/how-nasty-gal-went-from-an-85-million-company-to-
bankruptcy.aspx)

------
em0ney
Can't read the article without a subscription to WSJ

~~~
smcl
Oh dear - they closed the loophole. It's a shame, but if it's something they
need to do to survive then fair play. I do wonder if these should be permitted
on HN now though...

~~~
merb
How could a site make an article behind a paywall that's available for free
somewhere else, especially if it's not their article... getting money from
others work seems a little bit odd.

~~~
vogt
yeah, no clue. after seeing this article behind a paywall I simply googled
"nasty gal" and the results returned this article first and a LA Times version
of the story second. no paywall on the LAT for me. whether or not the story
was the same quality, I have no idea.

~~~
cyberferret
I believe if you click the 'web' link under the title of the article here on
HN, it will take you to a Google search page which will (sometimes) show you
other sources for the same article.

Also, I've been getting around the paywall from Washington Post and NY Times
etc. by right clicking on an article I know comes from their site and
selecting 'Open in Incognito Window' in Chrome. The lack of cookie tracking
gives me infinite free article previews.

(Yes, I do feel a little guilty about this and will pay for a subscription to
one or both papers to support them sometime soon). :)

~~~
DanBC
This no longer works reliably for the WSJ.

~~~
DanBC
I can't edit my post, but here's a thread full of people saying the WSJ
workaround no longer reliably works:
[https://news.ycombinator.com/item?id=13434938](https://news.ycombinator.com/item?id=13434938)

