Sunday, April 19, 2015

Sunday Globe Special: Bad Karmaloop

I'm bankrupt at this point as far as interest in the Bo$ton Globe goes. Sorry.

"Ill-fated ventures led to Karmaloop’s fall; As auction looms for streetwear giant, future role for its founder is uncertain" by Taryn Luna Globe Correspondent  April 12, 2015

Greg Selkoe was in his 20s when he dreamed up a company that fused fashion with pop culture and technology, the kind of cutting-edge business you would expect to find in New York. He happened to be dreaming from his parents’ basement in Jamaica Plain.

Selkoe didn’t stay there long. His company, Karmaloop, became the go-to online destination to buy streetwear — a mix of skate, surf, hip-hop, and other fashions — that connected customers outside America's fashion meccas with up-and-coming designers. No one did that when Selkoe started in 1999 and Karmaloop’s business grew steadily, eventually producing annual sales of $127 million.

Selkoe wasn’t just selling clothes. He was doing business with pop figures from singer Pharrell Williams to artist Shepard Fairey. Selkoe’s company was throwing big parties at clubs from New York to Las Vegas.

But behind the scenes, Karmaloop’s once-booming business began to unravel.

The company launched a series of ill-fated and expensive business ventures, including a failed $14 million attempt to cross over into television, and sales slumped. Over a two-year period, Karmaloop approached more than 280 potential investors, hoping to infuse desperately needed capital into business. They all turned the company down, according to the bankruptcy filing.

The financial strain finally forced Karmaloop to file for bankruptcy protection in March. The company intends to reorganize and continue on after an auction of the business scheduled for next month, although what if any role Selkoe would have in a reorganized Karmaloop is unclear.

“At the end of the day you need to have strong financial controls,” said Sucharita Mulpuru, an e-commerce analyst with Forrester Research. “The fact that [Selkoe] let it get out of hand and didn’t listen to the warnings or have the right people in place to identify the warnings, speaks to his inability to manage the business.”

Selkoe disagreed with Mulpuru. He said the company had successes over the years and Karmaloop’s financial teams managed resources to the best of their ability.

Bankruptcy court documents and interviews with vendors portrayed a company that fell deeper and deeper into debt over the last two years and eventually owed more than $100 million. At the time of the filing, Karmaloop owed more than $19 million to vendors alone.

It’s hard to pinpoint exactly when the company started faltering, but Karmaloop and Selkoe had exaggerated annual sales of the private company in media interviews and news releases for the business as far back as 2010, based on figures in court documents and provided by Karmaloop officials for this story.

When asked about the discrepancy, Selkoe, responding to written questions via e-mail, said “many retailers” cite gross numbers publicly and those figures are considerably larger than net sales. He declined to be interviewed.

Karmaloop’s television project was among its most expensive mistakes. The company began streaming its own video programming in 2008 and two years later Selkoe told the Globe he intended to cross over to television with a Comcast cable channel, KTV. At the time, Selkoe touted a lofty goal to recreate the magic of MTV in its early days.

He had hired Williams, the musician and producer, to serve as the chief creative officer and tapped a Hollywood heavyweight, Katie McEnroe, to lead the charge. In all, Selkoe spent $14 million on content, consultants, parties, and other expenses related to the project, according to court records.

But KTV never aired on a single television screen and Comcast didn’t give Karmaloop the channel, court records show. In the bankruptcy filings McEnroe is listed as one of Karmaloop’s top creditors and is owed more than $900,000.

Karmaloop’s e-commerce expansion was also sputtering. The company launched and shuttered the Boylston Trading Co. site, an attempt to enter the high-end fashion world and sell more expensive clothing. Monark Box, a subscription service that mailed boxes of “exclusive” gear to members each month, also failed., an attempt to grow Karmaloop’s female customer base, closed as well, according to the company.

Selkoe, asked what, in retrospect, he might have done differently, wrote that he wouldn’t have started “ancillary sites that caused us to stray from the company’s core business.”

“None were bad ideas, but it was too much too quick,” he wrote. “The funding market changed quickly — some sites were gaining traction, but they were true startups and needed to burn cash for a while and a bunch of things came together that made that unsupportable.”

Karmaloop started to experience cash-flow problems two years ago and last spring, Karmaloop took out loans to make it through the back-to-school and holiday retail seasons that lay ahead. By October, the company had breached financial terms with its creditor and defaulted on its loan, according to a bankruptcy document.

At the same time, Karmaloop’s sales were sliding. Revenues in 2014 amounted to $80 million, about a third less than sales the previous year, according to Brian Davies, whose firm Capstone Partners was hired in December to serve as Karmaloop’s financial advisor.

Late last year, to reduce costs, Karmaloop cut its staff by more than 20 employees. Meanwhile, the money Karmaloop owed vendors was adding up. Consumers also went online to complain about orders that never arrived and poor customer service....


RelatedKarmaloop bidding could start as low as $13 million

I'm hoping mine is good today for the last Sunday of basketball -- for this year.


Wednesday is deadline to bid for Karmaloop

Karmaloop sale approved, CEO Selkoe to be replaced