Fab.com’s Ascent to $1 Billion Valuation Brings Missteps

Fab.com Inc., valued at more than $1 billion dollars after just two years in existence, is suffering growing pains from its rapid expansion as it applies a culture of meticulous control to a global business.

The online retailer -- a darling of the New York startup scene for its uniquely designed home goods, art and jewelry -- has made five acquisitions, expanded its staff to 650 people and spent tens of millions of dollars on marketing. It’s also lost or fired at least 11 of its executives in the past year and missed its targets for revenue by almost 20 percent.

To give investors a return on the more than $310 million they’ve put into the company so far, Chief Executive Officer Jason Goldberg will have to prove that he can handle an international expansion and push into new lines of business, such as Fab-branded products. At the same time, Goldberg and co-founder Bradford Shellhammer are honing a management approach that has involved threatening to fire workers in companywide e-mails and barring employees from hanging their jackets over their chairs.

“It is impossible to grow a company as fast as we’ve grown Fab without having mistakes along the way,” Goldberg said in an interview. “Hopefully we’re able to adjust and make changes effectively. We aim to be a learning organization.”

Fab brought in $113 million in global revenue in 2012, missing the $140 million Goldberg had publicly aimed for, according to an internal e-mail obtained by Bloomberg News. Goldberg confirmed that he sent the e-mail, saying revenue was later revised to $115 million. The money-losing company is projecting sales of $200 million to $300 million this year.

Marketing Costs

Goldberg, who previously founded startups such as Socialmedian Inc., aspires to make Fab as influential as Amazon.com Inc. or Ikea. That’s meant spending heavily on marketing, including TV ads -- an unusual expense for a startup in its second year.

Aiming to project an image of offbeat fun and design savvy, Fab devoted about $40 million, or 35 percent of revenue, to marketing last year. Fab has since learned to more efficiently target its advertising and plans to spend less than $30 million on marketing this year, Goldberg said.

Fab focuses on products that elicit a passionate reaction from customers and can’t be purchased elsewhere -- something Goldberg calls “emotional commerce.” Its items are often quirky: a vintage yellow typewriter, tables shaped like U.S. states, or a piggy bank flocked in faux grass.

‘Be Fab’

The company’s attention to detail extends to its Manhattan office, where employees are asked to send e-mails in a certain font, use high-quality paper and always “be Fab.” The founders say it’s not much to ask in an office that provides beer on tap, free lunch and an ice-cream machine, and lets employees personalize their desks with small items from the site.

The headquarters, located in the West Village, features one conference room with scratch-and-sniff banana wallpaper and another made of removable blocks that employees can sit on. The office doubles as a showroom for Fab products and the idea is to make everything “pixel perfect,” said Goldberg, wearing all black except for a red belt.

“We believe in this notion of pixel perfect and we shouldn’t stop short of that,” said Goldberg, 41, who sports a trim beard and neatly coiffed hair. “We should make sure it is done the Fab way.”

‘Our Sass’

Employees who don’t comply face consequences.

One e-mail to the New York office from Goldberg on Dec. 6 asked for a confession from whichever employee left a mess in Fab’s model apartment -- a showcase for its products within the company’s 47,000-square-foot workplace.

“Don’t confess and we find out it’s you and you will be fired. Period,” he wrote. He promised a $100 Fab gift card in exchange for a confession.

A message on Feb. 4 carried the subject header “Do you like getting paid?” Goldberg told employees they were required to have a photo uploaded to the “team” page on Fab.com “in order to be eligible for the next company pay period. No exceptions.”

An e-mail on Oct. 11 from Shellhammer, who serves as chief design officer, forbids people from modeling Fab’s products. Employees had been inserting themselves into shots of the company’s wares posted on its website. “If you have time to model, you have time to get fired,” Shellhammer wrote.

That, Goldberg said, was a joke.

“This is a little bit of our sass,” he said, while confirming that the e-mails were sent. “We are hard-driving, we are a little bit tough sometimes, and we make clear to people: ‘We are very fortunate to have this opportunity.’”

Executive Departures

The heavy-handed approach has contributed to management turnover, according to six current and former employees who asked not to be named.

Executives who have left include Fab’s chief marketing officer and the directors of human resources, communications, buying and logistics. Goldberg said that turnover is natural at a fast-growing startup, and Fab’s is relatively low.

Fab debuted in June 2011 after a previous incarnation of the company -- Fabulis.com, a gay social network -- failed to attract enough users. The company raised $150 million last week from investors, including China’s Tencent Holdings Ltd. The deal, which valued the whole company at $1 billion, has helped elevate Fab to the upper echelon of New York startups.

London, Berlin

Goldberg wants Fab to be the next e-commerce company worth more than $10 billion, operating at the scale of Amazon, Alibaba.com Ltd., EBay Inc. and Rakuten Inc., he said. To expand in Europe, Fab acquired companies in Germany and the U.K., only to discover that it didn’t make sense to have two offices in the region. So it shut down the London operation and asked the employees to move to Berlin, irking some workers.

“We’re learning how to be a global company,” Goldberg said. “On one hand we’re saying, ‘Make mistakes,’ and at the same time we’re saying, ‘Get s--t done.’”

The latest round of funding may go toward an Asian expansion, though there’s no time frame for when that might happen, Goldberg said. The near-term growth is less important than Fab’s ability to establish staying power, he said.

“I don’t care if we do $200 million or $300 million in sales,” he said. “I just care that we grow for the long term.”

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