Venture Backers Take Loss in JustFab Acquisition of ShoeDazzleAugust 21, 2013
by Lizette Chapman
Cash and culture drove the sale of subscription e-commerce pioneer ShoeDazzle Inc. to longtime rival JustFab Inc.
Jeremy Liew, a partner with Lightspeed Venture Partners and an early ShoeDazzle investor, said the company was valued at "well north of $30 million" in the acquisition. That's a considerable drop from May 2011, when Andreessen Horowitz led a $40 million round in the company at a $240 million valuation.
"It was less of a question of, 'Is the valuation lower than last time?" than, 'Was it the right decision for the company right now?" said Mr. Liew, adding that ShoeDazzle also explored raising a fresh round of financing. "We believe that [the combined company] will be a powerful company going forward. It was the right thing to do."
The deal, which was announced by the companies Wednesday, pulls ShoeDazzle under the corporate parentage of JustFab but will allow the ShoeDazzle brand to continue operating distinctly. ShoeDazzle co-founder and President MJ Eng will continue to run ShoeDazzle while ShoeDazzle co-founder and former Chief Executive Brian Lee will join JustFab's board of directors.
Andreessen Horowitz, Lightspeeed Venture Partners, Polaris Partners and Crosscut Ventures , which invested a combined $66 million in ShoeDazzle since its founding in 2008, are now shareholders in JustFab. Only Crosscut Ventures, which sold 90% of its early shares in ShoeDazzle when it was valued at $240 million, has gotten a return on its investment, VentureWire has learned.
"What we saw were six competitors all doing the same thing and beating each other up with the cost of media and getting new members. We just didn't see the math so we sold," said Crosscut Ventures co-founder and Operating Partner Brian Garrett . "We're the only ones who got any liquidity on this."
Crosscut was also the only firm with holdings in both companies, VentureWire has learned.
Crosscut Ventures , where JustFab Co-CEO Adam Goldenberg is also a venture partner, did a stealth secondary investment into JustFab parent company Intelligent Beauty Inc . last year, Mr. Garrett said.
Launched within a year of each other, ShoeDazzle and JustFab are strikingly similar. Both enlist a celebrity stylist to curate items for members based on preferences they describe in a questionnaire when they join the service. Members pay $39.95 a month and receive a new item, typically shoes, handbags or accessories, in the mail every month.
The companies contract with manufacturers in China and other spots and deliver private label fashion on demand. Similar to compact-disc clubs of the 1980s, the subscription e-commerce model relies on recurring revenue and the strong likelihood that members will like items, or like them enough that they forego the hassle of returning them.
"I don't think we'd be nearly as strong as we are today if we hadn't been slugging it out with those guys," said Josh Hannah , a general partner at Matrix Partners and JustFab board member, referring to ShoeDazzle . "But at some point it's nice if you don't have to. It was no picnic getting this deal done. We gave them lots of room to explore other options before deciding this was what they wanted to do."
Mr. Hannah said he expects to see greater efficiencies and cost reductions in manufacturing and shipping items. He expects that customers of the two brands will stay separate, however. As each company has honed its message during the last six months or so, he said, member overlap has decreased.
"We're more value-driven, more bold and humorous, while ( ShoeDazzle ) is more edgy and glamorous," he said. "In uniting the business, we'll appeal to more women."
Mr. Goldenberg and JustFab Co-CEO Don Ressler will continue to serve in the same positions as co-CEOs at the new entity. The new JustFab will employ a combined 500 employees, most of whom will be housed in a new corporate headquarters now under construction in El Segundo, Calif.
The combined company now counts 33 million members, one million of whom are paying customers, Mr. Goldenberg told VentureWire.
Mr. Goldenberg said he expects the company will generate $400 million in revenue and be profitable in 2014.
JustFab has raised $109 million from investors including Matrix Partners , Technology Crossover Partners and Rho Capital Partners.