What Happened to Nasty Gal?

Nasty Gal filed for Chapter 11 bankruptcy protection. This surprised me. It looked like Nasty Gal was a good company, Amoruso was #53 on the Forbes self-made richest women list, and I even linked to her  book a bunch of times! What the hell happened?

In my book about startups that failed, there were 6 themes to the mistakes:

1. Failure to understand customers.
2. Failure to manage money.
3. Failure of strategy.
4. Failure of key skills.
5. Back luck.
6. Bad teams.

Let’s use those things as a template to see what parts Nasty Gal got right and wrong.

As Professor Sanjay Bakshi reminds us, we should always start with part-of-the-reason thinking. We can’t perfectly paint the picture of what happened but we can bring it into focus.

1/ Customers.

What Nasty Gal did right: In #Girlboss Amoruso wrote that she has a friend adding software on MySpace and she “responded to every single comment that anyone left on my page.”

“Social media allows me to have my ear to the ground even when I’m out pounding the pavement.”

Too often founders had the Field of Dreams delusion, if I built it they will come. That rarely happens. Instead, founders must talk to people and figure out what they want and build that. 

What Nasty Gal did wrong: Time does not scale. Early on Amoruso could devote time to each customer comment. That’s impossible now.

The problem was that Amoruso got too far on her own. In Here Comes Everybody, Clay Shirky addresses the lower operating costs available to Amoruso. Social media and online auctions allowed her to transact with customers at a cost never seen before. Shirky explains that audience size and conversation are inversely correlated.

• The larger the audience, the less conversation (and more broadcast).
• The smaller the audience, the more conversation (and less broadcast).

The Facebook group “Summer Running Club” is small and conversational. The Runner’s World magazine is large and not. As Nasty Gal grew Amoruso lost the pulse of her community.

Nasty Gal also failed to develop a system for interaction with customers. Amoruso told Tim Ferriss in an October 2015 interview, “we still don’t have the systems we’d like to have.” Add in the fact a that new customers aren’t (forgiving) brand loyalists, but people who have less affinity (and forgiveness).

2/ Money.

What Nasty Gal did right: Amoruso carefully stair stepped her location size. When the company moved and bought Herman Miller chairs, Amoruso found out and got rid of them. “It sent the wrong message,” Amoruso writes, “to preach frugality while balling out on twelve grand worth of chairs.” Nasty Gal had to be bootstrapped because no one would lend to Amoruso:

“As I had no financial cushion to support me while the business ramped up, I had to bust my ass and make it profitable from day one. In the end, this meant that I grew Nasty Gal to $28 million in revenue without borrowing a dime.

She told Tim Ferriss, “I didn’t need stuff, I lived in a pool house for 500 dollars a month.” During the early years Amoruso was frugal.

What Nasty Gal did wrong. Those frugal ways went by the wayside. Nasty Gal raised $65M in venture funding in the last four years to facilitate growth. As a private company we don’t get to see what they spent, but they did hire too fast and raised a lot of money.

Maybe the actual strategy matters less than the consistency of it. Soon after Alex Blumberg started Gimlet, he said they might be profitable sooner than expected. When Chris Sacca heard this he called Blumberg (Sacca is an investor) and told him he was going about it all wrong. Gimlet was a growth company and needed to prioritize that.

Was Nasty Gal a profitability company that mistakenly switched to growth?

3/ Strategy.

What Nasty Gal did right:

“Many of the vintage shops already on eBay were so bohemian it hurt, with names like Lady in the Tall Grass Vintage or Spirit Moon Raven Sister Vintage. So the contrarian in me grabbed the keyboard and named my shop-to-be Nasty Gal Vintage.”

Nasty Gal was differentiated. It’s brand was vintage clothes with a modern attitude.

Brand was their moat. Brand moats are some of the most difficult to build but most defensible once established. Don Keough and Mohnish Pabrai have spoken about Coke’s brand. Phil Knight has written about the Nike brand. Andy Katz-Mayfield has spoken about the Harry’s brand.

What each of them noted is that brand takes a loooong time to build. Harry’s, much like Nasty Gal, is now large enough that others are taking notice. This is dangerous territory. It’s why Nasty Gal got sued by Chanel (among others).

Strong brand moats exist when customers are insensitive to price. Nasty Gal didn’t get there as this Reddit post shows. People liked the look, but shared cheaper alternatives.

One year I volunteered at a PTO fundraiser before Christmas with some other parents. As we packaged meals we talked about Christmas gifts for our kids. One mom said her son asked for only one thing, Nike Elite socks. “They’re $14 a pair,” she said, “but it’s the only thing he wants.”

When a kid asks for socks, that’s a brand.

What Nasty Gal did wrong. Their moat was never deep enough.

4/ Key skills.

What Nasty Gal did right: Early on Amoruso had all the necessary skills. She knew what would sell:

“If it sold, cool—I’d instantly go find more things like it. If it didn’t, I wouldn’t touch anything like it with a ten-foot pole ever again.”

How to post it:

“Silhouette was always the most important element in my photos. It was critical on eBay, because that was what stood out when potential customers were zooming through thumbnails, giving less than a microsecond’s thought to each item.”

And when to put it online:

“The prime time for auctions to go live was Sunday evening.”

Amoruso had all the key skills to sell on eBay. She knew what to buy, how to describe it, how to take a good thumbnail, and when to put it online.  Jason Calacanis said he looks for founders who have a deep knowledge of their product, their competitors, and their industry. Amoruso had that.

What Nasty Gal did wrong:

As the company grew Amoruso’s skills overlapped less with what the business needed. She told Tim Ferriss that “culture can be used as a weapon…we’ve been working on a brand bible.” She didn’t need a brand bible early on because she was the brand. As the company grew, deficiencies in leadership were more damaging than deficiencies in Photoshop.

Amoruso noticed this, “the things I think I’m good at aren’t the skills a CEO needs to do,” she told Ferriss.  She told Forbes, “It takes a lifetime of chops to learn what my CEO, Sheree, knows about leadership. That’s a learning curve I didn’t want Nasty Gal to absorb.”

The mistake comes in the timing. Nasty Gal needed someone with those key skills sooner.  In the same Forbes interview she says:

“No one knows what it takes to be CEO, even CEOs. My advice would be to get some real management chops, work for some great companies, and know more than I did before you try to do what I’ve done. I have learned some hard lessons on the job, and some that I wish could have been a bit earlier in my career.”

It took too long to switch to someone who had the right skills.

5/ Luck.

What Nasty Gal did right.

It was “very serendipitous that it worked out at all,” Amoruso told Ferriss. She was a community college dropout who dabbled in petty shoplifting. But she did have some tailwinds.

Amoruso recognized the opportunity on MySpace and eBay, and cruised on those gusts as long as possible. She had good timing with social media, venture capital, and direct to consumer internet businesses. Her personal story yielded a book deal. A lot of things that could go right for Nasty Gal did go right.

Like Bill Gurley, when opportunity knocked, Amoruso answered.

What Nasty Gal did wrong. 

It’s hard to say they did anything wrong. Luck, as Michael Mauboussin points out, is something you can’t control. Nasty Gal’s success and failures very clearly fit the two-jar model.

6/ Team.

What Nasty Gal did right.

Early on Amoruso hired well. It was hard work but once she found people who could do a job she often stuck with them.

What Nasty Gal did wrong. 

The NYT reports that there were problems with the team:

Despite its successes, Nasty Gal went through several rounds of layoffs, in 2014 and earlier this year. High-level hires, like Kate Williams (editorial director) and Christian Parkes (vice president for brand marketing), left quickly, while other employees expressed discontent, rating the company 2.8 stars out of 5 on Glassdoor.

In 2015, Aimee Concepcion sued the company for laying off her and two others just before they were set to take maternity leave, while Farah Saberi claimed in a lawsuit that she was let go because she came in late to work and took a five-week leave after she was diagnosed with a kidney disease.

Team members are a stakeholder, and getting the right ones matter.  Wesley Gray said that they screen for a certain type of investor. Morgan Housel and Patrick O’Shaughnessy talk about how Valve and Zappos do this well. Louis C.K.  considered it too when he made Horace and Pete.

Closing words. 

The biggest thing I got from the articles about Nasty Gal and Amoruso was how tightly connected the two are. That worked fine early on, as Amoruso’s hustle, eye, and motivation were aligned with what the company needed.

Things went wrong when Amoruso’s skills separated from what the company needed. She wasn’t good enough, couldn’t be good enough, no one person is. Like a sports team that overachieves, Amoruso got a long ways on her own.

On Shark Tank, Kevin O’Leary often asks a pitching entrepreneur what would happen to their company if they walked out of the studio and got hit by a buss. The macabre questioning is good for TV, but it gets at something too, something Nasty Gal never answered.

Nike was never Phil Knight. Harry’s was never Andy Katz-Mayfield. Instagram was never, hold on, let me Google it…Kevin Systrom.

Nasty Gal was Sophia Amoruso. She did a good job, probably about as good a job as one person can.