Luxeyard Inc. was ready to ride the wave of flash-sale websites and become one of the stars of the L.A. tech scene when it launched a year ago. It raised capital, made an acquisition and expanded its user base. It even went public. Then everything evaporated.
The Culver City company, which offers limited-time discounts on high-end furniture online, watched its stock tank as it quickly burned through almost all the money it raised through private investors and the public markets. Its stock is now trading at about two cents a share, down 99 percent from its high in May. It fired its chief executive in October. In November, it reported a third quarter operating loss of more than $3.6 million on $574,381 in revenue.
The quarterly report included a statement that the company might not be able to continue. To top it off, several creditors recently hit the company with an involuntary Chapter 7 bankruptcy petition. The company said the petition has no merit.
“There was a time where we felt like we had found the Holy Grail,” said Amir Mireskandari, chairman and acting chief executive at Luxeyard. “Now we have to come in under extreme duress and (we have) very little cash left. The only things we have are the technology, our user base and a team of fighters.”
Mireskandari founded Luxeyard in April 2011 in Houston with the hopes of riding the trend of daily deals and flash-sale websites that were attracting interest and lots of money from the venture capital community. Flash-sale sites offer limited-time discounts on merchandise; they’re similar to daily deal sites such as Groupon in that they email members about specials.
Mireskandari hoped he was kicking off the next generation of flash-sale sites by making the customer experience more interactive. For example, customers could post requests on the site for the styles of chairs or couches they wanted to see for sale. Manufacturers delivered the merchandise, such as designer coffee tables and rugs, so Luxeyard didn’t have to deal with warehousing or shipping. Luxeyard takes a percentage of each sale.
Mireskandari hired Braden Richter, who had run furniture businesses before, as chief executive and the company moved to Los Angeles.
They raised $3.5 million in funding before going public through a reverse merger into a shell company. In total, Luxeyard raised about $8.5 million from private and public investors.
But Luxeyard hemorrhaged cash. It spent between $700,000 and $1 million every month as it bought other companies, tried to reach more customers and built its site.
In a lawsuit filed in August, Luxeyard accused investors of manipulating its stock in a “pump-and-dump” scheme. In a typical example, shareholders tout the stock before selling a massive amount at the peak, driving the shares’ value down while taking an outsized profit. Luxeyard said investors made off with about $30 million in this fashion. The investors paid $1.5 million to settle the suit.
In other lawsuits, Luxeyard accused Richter of undermining the company through self-dealing transactions. Among other accusations, the company claims Richter; his wife, Victoria; and his wife’s furniture store, Jaxon International LLC in Culver City, owe Luxeyard $308,000 for a loan. Luxeyard also accused Richter of conspiring in the alleged pump-and-dump scheme. Richter denied all accusations.
Richter told the Business Journal that Luxeyard tried to blame its failure on him after it became clear it wasn’t raising the money it needed to prosper.
“The company did not know what it was getting into,” Richter said. “The company thought it was going to raise a lot more money than it did. It did not have people in place that knew the public markets. It always had its back against the wall.”
Gone in flash
Now the company is trying to turn around. In its prime, Luxeyard had 63 employees. It now has 12. It has reduced its spending to about $100,000 a month.
“The combination is not pretty,” Mireskandari said. “We have a lot of angry shareholders. And then in middle of this we’re trying to pivot our business.”
And the appeal of flash-sale sites might not be what it once was.
“In general it’s hard for flash-sale sites,” said Sucharita Mulpuru, an e-commerce and consumer behavior analyst at Forrester Research Inc. in Cambridge, Mass. “There’s email fatigue; there is a scarcity of good merchandise that people want to buy through flash sales. And the production costs can be expensive to photograph a lot of pieces, many of which may never sell.”
Some companies are still attracting a lot of capital. Seattle’s Zulily Inc., which offers discounted clothing for mothers, babies and children, recently raised $85 million in funding in a round led by Andreessen Horowitz.
“The story really is mixed,” Mulpuru said.
Flash-sale sites benefited early on from an excess of inventory that manufacturers had produced before the economy crashed in 2008. Josh Thompson, chief marketing officer at Luxeyard, said inventory is no longer flooding the market and manufacturers don’t need online discount retailers as much.
“You’re not getting as good of deals because those manufacturers are not sitting on as much inventory,” Thompson said.
So in addition to flash sales, the company is offering more deals that don’t expire so quickly, with the idea that customers will be more likely to purchase big-ticket items if they have time to consider the decision. Also, it recently revamped its site to group luxury items according to style.
But a turnaround will be difficult. In a business that relies heavily on marketing, it’s tough to stay competitive without money to use to reach customers.
“It’s like trying to drive a Lamborghini with no gas in the car,” Mireskandari said. “We don’t have money for marketing but we need to stay around to fight our fights.”
