The clock appears to have struck midnight for the Cinderella of tech.
The nickname was given to Sophia Amoruso, the young founder of clothing retailer and manufacturer Nasty Gal in a 2013 New York Times article for her ability to seemingly turn cast-off vintage clothes into hundreds of millions of dollars – within six years of its founding the company’s sales hit a reported $100 million.
This month, however, the magic ran out, as the company filed for bankruptcy protection, saying it didn’t have enough money to pay employees at the end of November.
“Even if you build a great brand and grow quickly, it doesn’t mean it’s sustainable,” said Ari Bloom, chief executive at Avametric, a Bay Area company that makes 3-D content-creation software for apparel companies. “They’re new businesses, interesting, they’ve done a good job building an audience, but when the economics don’t work, it’s hard to find a landing spot,” he said of many upstart e-tailers.
Neither Nasty Gal nor Amoruso responded to requests for comment, but in its bankruptcy filing, the company said it couldn’t keep up with its growth.
“Since its inception, Nasty Gal grew rapidly,” the company said in its filing. “Nasty Gal experienced difficulties, however, in managing its business to keep pace with this incredible growth, including adjusting its product mix and merchandise offerings for a booming customer base and developing internal systems to manage and control the business.”
But Nasty Gal followed a narrative that in other businesses led to success: founder Amoruso brought in an experienced executive, Sheree Waterson from Lululemon Athletica Inc., to run the company. Oftentimes young executives cede control to industry veterans to assure continued growth when their businesses reach a critical juncture. It didn’t work this time, and experts disagree about why.
Some blame Amoruso for stepping down as chief executive last year, saying her vision was critical for the brand. Another said she waited too long before bringing in help.
There were outside influences, too, such as the competitiveness of the fast-fashion market and the e-commerce landscape. In the past five years, multiple e-commerce businesses, including flash-sale retailers Fab.com, Gilt Groupe, and One Kings Lane, have gone out of business or were sold for much less than their peak valuations.
Off to the ball
Amoruso, 32, launched the eBay business that became Nasty Gal in 2006 while working a part-time job in the Bay Area, using social media to promote it.
In 2008, she started her own standalone e-commerce store, selling out her entire inventory the day after launching. She hired her first employee and the two began driving to Los Angeles to scavenge for clothes.
By 2011, the company had generated $28 million in revenue and had 100 employees. That year, it moved its headquarters to downtown Los Angeles to be closer to vendors. The next year, it had $100 million in sales.
Nasty Gal caught the eye of Danny Rimer, partner at Index Ventures, a venture capital firm that also invested in online retailers Net-a-Porter and ASOS.
“We had not seen anything like this in terms of groundswell and relationships with customers,” he told TechCrunch in 2012.
Index invested $49 million that year, part of which Nasty Gal used to build a fulfillment center in Shepherdsville, Ky. The retailer also started selling Nasty Gal branded merchandise, debuting the first collection at New York Fashion Week that year.
Midnight nears
In February 2014, Amoruso hired Waterson as president. Waterson came amid some corporate controversy: She had been fired as chief product officer at Lululemon after the company was forced to recall $67 million of yoga pants after complaints that the garments were see-through in the seat. That year, Amoruso also published her autobiography, New York Times bestseller “#Girlboss.”
The expansion brought growing pains. Glassdoor.com posters claiming to be employees complained that the company had no focus and was poorly managed. Four employees filed lawsuits last year alleging they were improperly terminated before or after maternity or other health leaves.
Meanwhile, the company had to fend off suits accusing it of copyright infringement, which is common in the fast-fashion industry, said Julie Zerbo, who writes a blog on the business and law of fashion, The Fashion Law.
“Their business model depends on it,” said Zerbo. “It’s how they got their fast-fashion name, because they take designs from the runway and they are able to make and sell them at a much faster rate than the original designer.”
Amoruso said in a March 2014 interview with Fast Company that she didn’t want to sell the company. But in August of that year, Nasty Gal signed an agreement with Peter J. Solomon Co., a New York investment bank, which started looking for a buyer or another way to raise capital.
Nasty Gal laid off almost 10 percent of its workforce of nearly 300 in September of that year, Tech Crunch reported.
Fierce competition
It’s not clear why sales decreased, but for the year ended Jan. 31, 2015, the company generated net revenue of $85 million, according to the bankruptcy filing.
Competition in the fast-fashion market today is fierce and young customers are unpredictable, said Roger Goddu, a partner at private equity firm Brentwood Associates who specializes in retail.
“Fashion can be fickle – what’s hot today is gone tomorrow,” he said.
Nasty Gal was competing with better-funded giants such as H&M, Forever 21, Zara, and Uniqlo.
At the same time, its prices were higher, with dresses ranging from $58 to almost $800.
On Nov. 21, 2014, the company celebrated the opening of its first brick-and-mortar store on Melrose Avenue in West Hollywood. Charlize Theron, now making a television series based on Amoruso’s autobiography, attended the event.
On the same day, the clock struck midnight for Fab.com. Reports surfaced that the company, which some observers had once thought could reach a $1 billion valuation and be the next Amazon, was in talks to sell for just $15 million.
Leaving the party
In January of last year, Amoruso announced that she would be replaced by Waterson as chief executive but stay on as executive chairwoman.
Brentwood’s Goddu said it can be good to bring in a leader with experience in a particular area because different skill sets are required for starting a business and for managing one.
“A lot of times, the person with the vision has a great concept, but they can only take it so far,” he said. “Sooner or later, they realize they need professional help.”
But Amoruso’s absence might have contributed to the company’s downfall, said Paula Rosenblum, managing partner at RSR Research in Miami, which studies the retail industry.
“She’s an arbiter of taste,” she said. “She left the taste level in someone else’s hands.”
Other companies have suffered after their founders stepped down, including women’s retailer Chico’s.
Perhaps the most similar example is flash-sale retailer Choxi. The company, founded in 2010 in New York, raised more than $50 million in venture capital and projected sales of $700 million for 2014. Founder and Chief Executive Deepak Agarwal left the company earlier this year, and the website disappeared this month without any explanation.
Fairy tale over
Early last year, Nasty Gal raised $16 million in a round led by Ron Johnson, who created the Apple retail concept, and opened its second brick-and-mortar store in Santa Monica.
The company took $20 million in loans in late 2015 and early this year.
But the other glass slipper had already dropped as the company’s underlying problems remained.
In September, Nasty Gal asked Peter J. Solomon Co. to look at restructuring or filing for bankruptcy.
In a filing asking the court for immediate relief, the company said it hadn’t been able to raise capital because market conditions for online retailers had depressed its value.
“Efforts at selling or merging the company have been hindered by a complex capital structure, the significant aging of Nasty Gal’s existing accounts payable, strained vendor relationships that have disrupted the normal flow of merchandise, and the need to further right-size its staff and facilities,” the company said.
As of August, Nasty Gal said it had $26.6 million in assets and $34.7 million in liabilities.
Happy ending?
The company said in its bankruptcy filing that it wanted to reorganize and keep running.
Nasty Gal could follow the example set by Betsey Johnson, which closed 63 stores after declaring bankruptcy in 2012 and pivoted to e-commerce.
Or it could follow the path of American Apparel, which filed for Chapter 11 a second time this month and faces a bankruptcy auction in December.
Nasty Gal will have to reinvent itself to survive, which can be harder than starting from scratch, said Peter Cowen, managing director at L.A. tech investment bank Sutton Capital Partners and an adjunct professor at UCLA’s Anderson School of Management.
“There’s the stigma of bankruptcy and laying off people, which is bad for morale and often requires strong leadership to turn it around,” said Cowen.
