As Fab Raises Another $150 Million at a $1 Billion Valuation, E-Commerce Industry Looks On Warily
Here’s an interesting exercise I tried recently when talking with entrepreneurs and venture capitalists involved in e-commerce: “I say ‘Fab’; you say?”
And then …
“A creation of the tech press.”
“Bankrupt within five years.”
There’s something about the two-year-old commerce company — and its brash CEO Jason Goldberg — that turns people into full-on Fab believers or never-gonna-convince-me haters.
Get ready for more of both kinds.
Fab just announced that it has raised an additional $150 million, bringing total investment to $310 million. The company’s pre-money valuation was $1 billion, according to spokeswoman Deborah Roth. And this is only the first part of its D round, Fab said, as it expects to close additional funds within a few months.
The round includes an investment from Chinese Internet behemoth Tencent, which owns a popular instant messaging service and gaming platform, among other products and Internet properties. Japan’s Itochu also contributed to the round, in addition to Andreessen Horowitz and Atomico, which headlined a long list of current investors who also participated.
Goldberg wrote in a blog post that Tencent will help bring Fab to millions of new people around the world. In an interview, though, he said that the two companies are still discussing how their strategic partnership will manifest itself to consumers.
One of the reasons Tencent was an attractive strategic investor was because it was amenable to a relationship that would keep the Fab brand front and center, Goldberg added, even as it helped bring the company’s products to the Chinese market.
“We had a lot of other companies that wanted to invest in Fab, and most of them wanted conditions and stipulations around it being their brand out front, or having a separate [joint venture] in their country,” Goldberg said. “We thought that was backwards.”
A source tells AllThingsD that Alibaba was one of the other international companies that Goldberg approached about an investment. The Fab CEO wouldn’t confirm or deny talks with Alibaba, but said, “All I can tell you is that there were various other companies that we spoke to, and many of these wanted different stipulations … that we weren’t willing to acquiesce to.”
The new investment should only lead to more chatter among industry insiders who believe, among other worries, that the company is raising too much money; that it is expanding too fast; that it must have weak margins; or, of course, that it will ultimately be stomped out by Amazon.
“Look, those are fair questions,” Goldberg told me in an interview. “I don’t consider us a success yet. We know we have a lot of work to do. But we believe in our strategy, and believe it’s going to take a good amount of investment to continue to build a ‘wow’ experience and build a great new e-commerce brand.”
He went on to say that when plans for international expansion were first talked about during a board meeting, he was the most apprehensive person in the room. But, to make a point, he used Zappos as an example of a great e-commerce brand that could have been much bigger, in his opinion, if it had expanded globally before clones in those areas beat it to it.
He said European clones also forced Fab’s hand, and made it necessary to expand rapidly overseas.
“We didn’t want to be in a position where we built our brand in the U.S. and another equivalent of Fab was built in another market,” he said.
Yet it’s clear in Goldberg’s blog post that he is sensitive to critics, as he addressed several points raised by them.
For one, he said Fab will differentiate by leading the way in a new commerce category “emotional commerce.” This is a clear attempt to separate his company from the likes of Amazon, which he said specialize in commodity purchases. And it’s smart — if you’re Fab, you create a separate market that doesn’t already exist, so you can own it.
Goldberg writes that emotional commerce “is all about getting lost in the moment.” To me, that means impulse buying — more specifically, the buying of things that you want, but don’t necessarily need. And, with the visual appeal of its properties and apps, Fab is appealing to even the most restrained shoppers.
Goldberg also took on some of the critics of the company’s finances, claiming that Fab has gross margins of 43 percent. It’s not clear, though, how Fab can sustain them as it expands rapidly, and whether it will eventually be able to curb its losses, which reportedly reached $90 million last year.
So, what does Fab need all this money for? Goldberg is stressing logistics, and how improvements in that part of the business have already resulted in much faster order-to-ship times. He says the company will open factories in the Netherlands this year, and Nevada next year.
The company is also going to ramp up its investment in working with designers to create products that end up being exclusive to Fab. Fab needs to absolutely nail this one if it really wants to prove that it is building a moat between its business and those of other e-commerce giants.
Goldberg said five percent of all revenue this year will come from products exclusive to Fab. The hope is to push that percentage to 30 percent to 40 percent by 2016.
“That’s a huge focus for us, internally,” he said.
Fab will generate sales of between $200 million and $300 million this year, Goldberg said — a large range, owing to the fact that the company isn’t quite sure what to expect out of international holiday sales.
“There are some who will call us a success because of this fundraise,” Goldberg wrote toward the end of his blog post. “They’ll say we’re worth billions. And, of course, there are some who will call it a bubble. We know that the truth is that raising money is not success.”
It’s certainly not. But in many ways, it has become the storyline Fab is best known for. When it no longer is, perhaps Goldberg might finally feel comfortable calling Fab a success.