Burn cash at your peril, start-ups!

Born in 1984 in San Diego, Sophia discovered her love and taste for vintage clothing in 1997, when she got a chance to try a persimmon-red pair of disco pants. She had no inkling then that her eye for vintage clothing would open up a new world to her!

From a sandwich artist at Subway to dumpster diver to being an accidental entrepreneur to a repeat entrepreneur, Sophia Amoruso’s journey has a lot of interesting takeaways for start-ups.

She dropped out of school and began homeschooling, after she was diagnosed with depression and attention deficit hyperactivity disorder (ADHD) in her adolescence.

When she was 15 Sophia got her first job at a?Subway?restaurant,?followed by several odd jobs like working in a bookstore and a record shop. In 2001, after her parents divorced she moved to?Sacramento, California to live a free lifestyle. She then even saw days when she took to dumpster diving and stealing.

Sophia liked to window-shop. Sometime in 2006, she found a leather jacket in a Salvation Army store and bought it at a throwaway price of $18. She was then working as a security guard at the Academy of Art University in San Francisco. She opened an online?eBay?store, which she named Nasty Gal Vintage, after the 1975 album by singer Betty Davis. She posted photograph of her, posed as model, wearing the jacket with some description there to sale the product. She sold the jacket for $1000.

Amoruso turned her expertise into opportunity. She continued to repeat the process. Thus an entrepreneur and a business venture were born. In her business, working out of her bedroom, she utilized her learning from photography class in styling, photographing and captioning in the page. She used to ship the products herself.

In 2008, Sophia stopped trading on eBay and launched?her own online retail store, Nasty Gal. When the number of users of Nasty Gal crossed 60,000, she created her own brand of vintage clothing. ?In 2012, when she started expanding she accepted a VC deal for $50 million equity investment.

Nasty Gals’ positioning idea revolved not only around how the girls thought of presenting themselves to the world but most importantly how they presented themselves to themselves when they chose to adorn themselves. It was like someone who is the best-dressed girl in the room, who is unafraid of taking risks with her style and gets dressed for herself and not for other people and just has fun with it.

Sophia Amoruso knew herself, knew her strengths and knew her audience. She knew the customers she was serving to and observed the gap in competitors’ understanding. She also had clear idea about the changing tastes and aspirations of her customers. She could read the pulse of the young minds and that is why they came back to Nasty Gal repeatedly.

• Sophia developed a customer-centric business model.
• Encouraged customers to use the hashtag NastyGal across all social networks.
• Engaged customers into brand conversation and ensured quick response to any question or comment.
• Everyone in Nasty Gal was a marketer.
• Ensured that every post in the portal had actual image of the product. Content included useful DIYs for customers on relevant topics such as makeup, hair and garment customization.
• Delighted customers by posting images of them to connect with and attract new customers as well. ?
• About 25% of her customers used to visit the Nasty Gal site at least once a day and stayed there for an average of seven minutes.
• Top 10% of the customers visited the site more than 100 times a month. According to customer feedback, many of them refreshed the site every half an hour to check if there was a new introduction.
• Nasty Gal used to sell 93% of its inventory which included apparel, shoes and accessories at full price whereas the industry was characterized by mark down.

By 2014, Sophia built a $100-million-plus technology based fashion retail empire with a 50,000 square feet office in Los Angeles, a distribution and fulfilment centre in Kentucky, and 350 employees. She opened another brick-and-mortar store in Santa Monica in 2015.

Growth of the company then started to stumble because of several reasons, including round of layoffs weakening employee morale and leadership problem. Sophia ceded her role as Chief Executive of Nasty Gal in 2015. The company filed for bankruptcy protection in November 2016, with her resigning as Executive Chairwoman. In?February 2017,?Nasty Gal was purchased for $20 million by Boohoo Group.?Later in December 2017, Sophia Amoruso founded Girlboss?Media, a company that creates editorial content, videos, and podcasts aimed at a female audience.

One of the main reasons for failure of Nasty Gal is same as we see in case of most start-ups – failure in cost management and cash flow management as well as burning cash. In an expansion spree Sophia splurged money for creating large infrastructures, which were not necessary then, and in brand marketing. ??

Therefore, it is imperative on start-ups to put in place a stringent cost analysis system from the very initial days. Periodic cost audits help in eliminating costs that may creep in stealthily.

Some takeaways:

• The costing system must capture all costs accurately and in a contextually relevant manner like material cost, conversion cost, cost of goods, marketing cost, dealership cost, advertising & sales promotion cost, sales force cost, interest cost as well as in-bound and out-bound logistics costs.
• A start-up should not ignore the power of compounding in debt. It should explore debt funding at a later stage when it is cash positive and has achieved significant volume and growth.
• Revenue does not pay bills. Gross Margin does. Focus on margin should not be lost. Founder’s extravagance soon becomes the culture in the firm. For example, if INR 100 is being spent on avoidable reason, value of the firm goes down by INR 100. If such act is repeated 100 times value of the company goes down by INR 10000. Lack of money deprives the firm of opportunity - known as opportunity cost.
• A start-up should never lose focus on its Net Cash Flow equation:

Net Cash flow = (Operating profit + depreciation + amortization) – interest paid – income tax

Profit and business success are closely connected. Optimizing resource utilization and adopting lean business philosophy are keys to scaling and customer value creation for start-ups.

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As an Entrepreneurship Educator and a Start-up Mentor, I am on my mission to contributing to growth of entrepreneurial ecosystem.

I believe that there are many under-privileged talents across the globe that, if given access to basic knowledge of start-up operations, can create major impact by crafting solutions that would help in achieving the UN SDGs. I believe start-ups have a great role in helping the world taking care of its sustainability and environment by coming up with life centred design of solutions.

To help and add value in lives of such start-up enthusiasts I write on different aspects of entrepreneurship in my newsletter ACUITY.

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Debasish Bhattacharyya

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