Lessons from a Decade in E-Commerce —Bootstrapping the World’s Largest Art Site
Part 3 — Bizzaro World, Naivete, and the Benefits of Privacy
Read Part 2 of this story before continuing, below, or go all the way back to the beginning.
Bizarro World and Naivete
I didn’t sell Fine Art America in 2010, but I walked away from that meeting in Chicago with a pretty good understanding of how investors and potential acquirers value businesses like mine. I also became friends with David, the investment banker, and continue to speak to him regularly to this day.
I had a decent understanding of what FAA was “worth” according to the outside world, and for the first time, I started paying attention to companies in my industry that traded on the NYSE and Nasdaq. Since they were public companies, I could look at their financials and see exactly how well they were doing.
The print-on-demand industry was still fairly new at the time, and one of the only companies that had gone public was Cafepress (symbol: PRSS). Cafepress went public in March 2012, and they were worth roughly $322 million at the time of their IPO.
How much did they make in profit in 2012?
$0
You can see their financials right here. Cafepress made $0 in 2012 and was worth $322 million according to the stock market. That didn’t make sense to me.
If your profits are $0, and your company is worth roughly 15 times your profits (see Part 2 of this story), then your company is worth $0. Right?
That’s not what Silicon Valley will tell you.
They’ll tell you that Cafepress was growing their sales very quickly and that, eventually, they would figure out how to become profitable by cutting costs, squeezing their suppliers, reducing artist payments, reducing payroll, etc.
Cafepress was indeed growing sales quite rapidly, but they were spending a fortune to do it.
Pretend you’re the CEO of Cafepress. It’s 2012, and your company is worth $322 million because you’ve sold investors on the “Silicon Valley story” that you’re growing sales very rapidly and that you’re going to figure out how to become profitable sometime soon.
What happens if your sales slow down or, even worse, start to decline?
The entire story crumbles. Your share price plummets. The value of your company plummets.
Suddenly, you’re in crisis mode because you’ve got thousands of investors who’ve lost millions of dollars that they invested in your company, and you’re forced to do anything that you can think of to keep sales growing and to keep the story alive.
That’s exactly what happened to Cafepress. Sales declined from $218 million in 2012 to $171 million in 2013, and the entire bottom fell out. Cafepress lost $14 million that year, and the value of the company plunged by almost 70% from $322 million to $100 million.
In order to try to keep the story alive that “sales are growing”, Cafepress went on a buying spree and bought up a bunch of companies so that they could “grow through acquisition”. They bought CanvasOnDemand.com. They bought GreatBigCanvas.com. They bought EZ Prints.
Ultimately, that plan didn’t work out, and as of today, Cafepress is now worth roughly $36 million (down from $322 million at their IPO).
Cafepress was done in by the fact that they raised money from investors and bought into the idea that they could grow at all costs and then figure out how to become profitable later on.
At one point, Cafepress had 750+ employees on their payroll.
That number is just staggering to me. I run Fine Art America with eight employees.
What were 750 people doing every day at Cafepress?
The big problem with Cafepress was that they raised money from investors, and investors aren’t happy with a small team of employees running a lean, profitable business. Investors want you to go big or go home.
Once the investors convince you to take their millions of dollars, they expect you to spend those millions of dollars hiring employees, buying online ads, and doing anything else that you can do to increase your sales. They want to be able to tell the story that your company is growing very quickly, “disrupting” an industry, and will eventually figure out how to become profitable.
If they can tell that story long enough for them to cash out, then everything works out just fine for the investors. Cafepress is the perfect example. When the company went public in 2012, it was worth $322 million dollars. The investors who cashed out at the IPO probably did just fine. Unfortunately, anyone who invested in Cafepress when they IPOed has now lost almost all of their money.
The Benefits of Privacy
When one of our competitors goes public, it’s a goldmine of information for us here at FAA and anyone else in the print-on-demand industry. After years of competing in the dark against privately held companies, we suddenly get to take a detailed look at their financials and see exactly how they’re really doing.
Every three months, they have to disclose their sales number, their advertising numbers, their profit numbers, etc… and if you read all of the additional investor-relations documents and transcripts that they put out each quarter, they’ll tell you exactly which parts of their businesses are growing, where they’re having the most success, what their plans are for the next quarter, etc.
Redbubble is a public company in the print-on-demand space. Do you want to know how Redbubble is doing and what their plans are for the future? You can read all about it right here:
http://shareholders.redbubble.com/irm/PDF/1338_0/FullYearResultsPresentationFY2017
Imagine you’re the CEO of an unprofitable company that’s gone public. You’ve raised millions of dollars from investors. You’ve lost a little bit of control of your business. The investors are pressuring you to significantly grow your payroll and increase your advertising spending which, in turn, makes your company even more unprofitable. You’re now spending your days answering questions from investors, generating forecasts and reports, and trying to figure out how to grow at 50% per year while simultaneously trying to become profitable. And… every three months… you have to disclose to the entire world exactly what you’re doing and how it’s going.
That sounds like a nightmare.
Since FAA is a private company and 100% self-funded, there are only a handful of people in the entire world who know how FAA makes money, which products and sales channels generate the most revenue, and what our plans are for the future. That’s a huge competitive advantage.
History Repeats Itself
As more and more print-on-demand companies went public, it became increasingly clear that history was just repeating itself.
Society6 is a print-on-demand business that’s owned by the public company, Leaf Group (stock symbol: LFGR). Leaf Group loses $2–3 million every month. They have $34 million left in the bank. Simple math will tell you that they’re going to run out of money in just a couple years unless something changes.
Redbubble went public on the Australian stock market last year, and they lost over $8 million in 2017 alone.
I’ve seen this story play out over and over again. VC-backed e-commerce companies seem to follow the same trajectory. They get funded, grow their payroll, chase top-line growth at all costs, fail to deliver on profitability, and wind up shells of their former selves. These companies make a big splash in the press when they get funded, but it’s much quieter in the news when things start to fall apart at the end.
Teespring raised $50 million just two years ago at a $650 million valuation and became a media darling as the future of e-commerce and the “T-shirt economy.” At the end of 2017, they laid off most of their staff:
https://news.crunchbase.com/news/teespring-undergoes-stiff-layoffs-corporate-restructuring/
https://news.crunchbase.com/news/heres-math-behind-teesprings-painful-recapitalization/
Everyone keeps raising money because that’s what they’re taught to do. If you’re building spaceships to fly you to Mars, then you definitely need to raise money. If you’re building an e-commerce website, then you probably don’t — especially in 2018.
