In 2013, a particular activewear retailer released some yoga pants. When women tried them on, they found that not only did the pants show off their curves, they showed off things better suited to the bedroom rather than the Yoga mat.
The company denied everything, blaming women’s bodies for the apparent design flaw. The company’s chief product officer stepped down after a major yoga pants recall.
Then the CEO of Nasty Gal came along two months later and scooped up the besmirched CPO. A move many look back to and wonder if it wasn’t the beginning of the end for Nasty Gal.
Former Nasty Gal CEO and founder Sophia Amoruso is your typical aspiring entrepreneur turned millionaire.
In 2006 she opened an eBay shop. Her approach to gaining leads and customers was unique. Get on MySpace. Find hip young women. Befriend them.
It worked, and soon her company rose out into the world full fledged and raging.
But something happened in the next decade that turned Nasty Gal sour. And at the end of 2016, the company filed for Chapter 11 bankruptcy protection.
But what brought Nasty Gal down even after the viral Nasty Woman meme should have given them a boost? Let’s dig in and see if we can’t unravel this not so subtle mystery.
1. Nasty Gal Wasn’t Alone
While I would love to pick on Nasty Gal alone, I can’t do that. Nasty Gal are only one in eight or so retail clothing companies who filed for bankruptcy protection near to the same time.
And all of those companies were built for youth and 20 somethings. So, something is going on with the clothing retail business sector.
Really, buying habits are the biggest culprit. Young people are less interested in high fashion and more interested in other goods like electronics. And major e-commerce sites like Amazon are gobbling up the markets like whales to plankton.
Nasty Gal certainly wasn’t the only retail company to find themselves in deep water in the last year or two. But their challenges were certainly unique.
2. A Startup and Her Investors
When a startup finds blinding success, it’s easy for it to reach too far and dream too big. One major overreach perfectly frames this concept.
Most startups use third party fulfillment and logistics services long into their successful years. The sheer overhead of renting a warehouse, staffing it, hiring drivers, and more, is gargantuan.
Nasty Gal took on the gargantuan after their 2012 fundraising success. They raised $40 million dollars off investors due to a 450% hike in reported sales from 2011-2012.
They immediately rented a 500,000 square-foot warehouse. A major investment for a fledgling company.
Along with their logistics overreach, they then turned around and invested a large sum in paid acquisition and advertising agency help.
Essentially, Nasty Gal ratcheted up the debt early and fast after gaining success. And investors weren’t too thrilled with what they were seeing. But they stuck with Nasty Gal as revenue remained healthy all the way through 2014.
3. #Girlboss: An Eclipse
When your startup actually becomes successful and moves out of startup mode, everybody wants to know how you did it. And when a woman beats the odds, that’s even more of a sensation.
Amoruso was no exception. Her success was viral and she knew how to take advantage of the fame. Write a memoir.
While fame is excellent, and it made Amoruso a lot of money, it wasn’t good for business. Her book essentially opened up a new Amoruso brand: #Girlboss.
Amoruso probably hoped the book and resulting publicity would boost the Nasty Gal brand. It didn’t. Instead, #Girlboss eclipsed Nasty Gal in a bad way.
It was about the time that #Girlboss became a chart topper that Nasty Gal began to flounder. And reports of ugliness below the executive level at Nasty Gal surfaced.
On the surface, this might be confusing. Why didn’t the connect brands float each other? Besides, celebrities create successful side ventures all the time. And their fame boosts their own brands.
But the problem comes when an entrepreneur becomes the celebrity and not vice-versa. Of course, the #Girlboss brand did very little harm to an already rotten Nasty Gal. It merely didn’t do what both investors and founders hoped it would do. Save a failing company.
4. The Last Ditch
Just before their court supervised corporate restructuring, Nasty Gal owed a lot of money to a lot of people. Nasty Gal bought from retailers but didn’t always pay.
They let the bill stack up and pushed their debt into the 100s of thousands. They began holding off on orders. This was a sure sign of decline in early 2015.
In a last ditch attempt to round up higher margins, Nasty Gal sought out higher priced brands. This completely backfired.
Instead of increasing margins, it decreased their customer base. And sales quickly declined.
Why were the Nasty Gal retailers making such massive mistakes? They had on board veteran retailers from several past major brands.
But their experience was moot in the face of digital transformation. Nasty Gal had two physical locations. And most of their business was online. Yet, they still couldn’t change with the times.
Cold Feet and Lack of Experience
Couple this with the fact their investors were mainly venture capitalists who expected a more liquid and debt free business and you have a recipe for disaster.
The kind of eCommerce business that relies on physical inventory needs investors who are in it for the long haul. And Nasty Gal just didn’t have that kind of backing.
It’s quite a nasty thing to have to restructure your whole venture. But if you find your company is in decline and you are close to bankruptcy, protection by the government might be the difference between life and death.
Not Gone Nasty Gal
Nasty Gal is still around. For how long, it’s hard to tell. But we can certainly learn from Amoruso’s mistakes.
For one, despite success remain modest. Do not overreach, especially if you retail physical products.
Investment capital is certainly important. But the right investors for your industry will not get cold feet. Find investors who are in it for the long haul.
Lastly, don’t get too wrapped up in your own success. Your face might eclipse your brand.
Check out our other case study on the Cha Cha Startup failure. It will certainly inspire you to do better.