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Death by Overfunding: Gilt Groupe

Posted on Monday, Jan 9th 2017

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At one time, the flash sales sector was a favorite with investors. We saw the valuation of several companies like Groupon, Gilt Groupe, LivingSocial, and Zulily skyrocket. But as the sector got washed in funding, companies stopped delivering on hyper growth. Investors fled from the scene and the companies collapsed. Gilt Groupe was acquired by Hudson Bay for a quarter of its estimated value at its peak.

Gilt Groupe’s Journey

Gilt was co-founded in 2007 by DoubleClick CEO Kevin Ryan, eBay executive Alexis Maybank, and a Bulgari and Louis Vuitton marketing executive Alexandra Wilson. They created an online portal for by-invitation-only sample sales based in New York. Gilt focused on being a flash sales site for designer products and luxury brands. The members-only shopping site allowed consumers to shop for curated styles, goods, and services at prices that were as much as 70% off the retail price.

Gilt basically offered unsold inventory that they picked up from designers and wholesalers at a steep discount. Gilt passed on this discount to its members and kept a share for itself. The model worked well during the economic downturn when retailers and brands had a lot of excess inventory that Gilt helped get rid of.

In 2010, at the height of its popularity, it moved beyond apparel. It added Jetsetter, an invitation-only travel sales site offering travel deals for more than 200 properties spread across 20 countries. It also launched a Groupon-like location-based deal site called Gilt City. It also started expanding internationally and set up its international headquarters in Ireland.

According to market reports, Gilt was making 50% gross margins on all sales and was estimated to have been EBITDA positive in 2011. Gross revenues grew from $450 million in 2011 to $550 million in 2012 and $600 million in 2013. But it failed to make any profit.

Instead, it was expanding beyond apparel into travel sales and food. It also expanded into Asia. But as it tried to deliver on hyper growth, it became difficult to procure excess high-end inventory at low costs, affecting margins. Gilt also had to deal with increasing competition from the likes of Amazon, which ventured into discount sales for luxury brands with the launch MyHabit in 2011.

In 2012, Gilt laid off 10% of its employees and shut down or sold its non-core verticals. In 2013, it changed CEOs. In 2015, it raised $46 million in a round led by General Atlantic that valued it at $600 million, down from its valuation of $1 billion at its peak in 2011 when it raised $138 million in a funding round.

Overall, Gilt raised $286 million from investors including GSV Capital, DFJ Growth, Pinnacle Ventures, TriplePoint Capital, Eastward Capital Partners, Matrix Partners, and General Atlantic.

In Janurary 2016, Gilt was acquired by Hudson Bay, owner of the Saks Off 5th stores, for $250 million. Hudson Bay is integrating Gilt into its operations. It allows Gilt shoppers to return items in its stores and has also opened a Gilt display in its New York City Saks Off 5th store.

A Lesson for Startups

The flash sale business model is hard to scale to billions of dollars as it is predicated upon the fact that there is a limited amount of designer products that are available for clearance at any given time. Typically, designers or retailers do not carry multi-billion dollars of excess inventory. Thus, there was always a fundamental flaw built into the investment thesis of the VCs who expected Gilt Groupe to scale to a multi-billion dollar company. And the entrepreneurs did not seem to correct this flawed thinking, nor, perhaps, were they aware that there was a flaw in their market projections.

Gilt Groupe simply could not have sustained itself without the market hype and exorbitant venture funding.

What entrepreneurs should learn from Gilt Groupe’s story is not to get seduced by flashing signs of VC money because it comes with a precise expectation: hyper growth. Gilt Groupe would have worked fine as a smaller business, catering to a smaller number of high quality shoppers. There is definitely a segment of women who shop designer clothing and accessories and they would have been happy to keep buying from Gilt Groupe if they continued to provide interesting fashion at attractive prices. But neither is this segment infinitely large, nor is the inventory available for liquidation infinitely large.

This was another niche idea that some delusional VCs and entrepreneurs decided to pump up.

And now, the balloon has been appropriately punctured.

Photo Credit:Michael Chen/Flickr.com

This segment is a part in the series : Death by Overfunding

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