Learning from Fab and Aereo: Liquidity Matters
Dec 10th, 2014
Note: This post was co-authored by Shri Bhashyam and Atish Davda and appears at Inc. in its entirety.
Recent news of Fab's fire sale and Aereo's bankruptcy filing sent a jolt through the startup world. For employees of these companies, the news surely has a major adverse impact on their finances. Startup shareholders--employees and founders alike--should take heed as they ride the startup roller coaster.
Meteoric Rise, Precipitous Fall
Fab.com, nee Fabulis, was founded in 2010 as a social network for the gay community. On the brink of shut down, the founders decided to pivot in 2011, capitalizing on their passion--design--to form a home decor flash sales business based on co-founder Bradford Shellhammer's design eye. Within a year, Fab had over 1 million members and a $50 million run rate. Things peaked a short 2.5 years or so after the pivot, when Fab raised $150 million at a $1 billion valuation in June 2013. It has since been a downhill ride, punctuated by Shellhammer's departure in late 2013, followed by a wave of layoffs as the company realized that flash sales do not a sustainable e-commerce company make. Finally, on November 21, 2014, it was announced that Fab would be sold to PCH International for $15-50 million, meaning that its current value may be as low as 1.5% of its peak value.
Aereo has had a similar rise, founded in 2012 with total fundraising reaching $97 million by January 2014. The company reached a reported $800 million valuation, with 350,000 subscribers in 11 US markets. On November 21, 2014, Aereo announced that it had filed for bankruptcy. Aereo's story is a bit different from Fab's in that it was a classic, all-or-none venture capital wager. The company captured over-the-air television signals via antennae, and rented the antennae to customers, who could then stream and record programming. The cable companies sued, alleging that the signal capture was illegal, and the fight went all the way to the Supreme Court, with Aereo losing the case. With no Plan B, the next chapter for Aereo is Chapter 11.
That Old Saying About Eggs and Baskets...
Continue reading on Inc.com for a discussion of implications for employees and shareholders at high-growth startups.