The “Nasty” Effect: Exploring E-Comm’s New VolatilityThe “Nasty” Effect:Exploring E-Comm’s New VolatilitySharesAfter becoming a brand that so many fashion technology startups saw as an example to model, Sophia Amoruso’s edgy Ebay-cum-clothing business, Nasty Gal took an unexpected turn towards bankruptcy this past week.The news, which was made public on 11/9, comes about a year after the announcement was made that Amoruso would step down from the helm of the company. She surrendered the top spot in 2015 to Lululemon alum, Sheree Waterson. In operation for 10 years, Nasty Gal had raised a total of $65 million to date. Index Ventures was the company’s primary backer, with a $49 million investment in 2012. In February of last year former Apple and JC Penney retail executive, Ron Johnson invested an additional $16 million, with the goal to grow the company’s retail footprint, comprised of two stand-alone outposts in LA and Santa Monica. “Nasty Gal has been a company that I have looked up to for a long time now but the e-commerce world is changing. It’s not like other industries where it has been easier to create a long-term plan that will succeed. You have to constantly be recreating your plan and adapting to the ever-changing landscape that is the Internet. I think once a company grows larger, like Nasty Gal it can become more difficult to implement drastic change at the touch of a button when there are more key players and more corporate type of action that needs to take place.”-Nicole Bandklayder, Co-Founder of Bijouxx Jewels“The investment horizon, scale trajectory and realm of likely exit outcomes for tech- enabled brands differ significant from traditional tech companies and require a different capitalization and growth strategy ,” says Natalie Hwang, who manages Simon Venture Group, an early stage venture capital fund based in NYC that is exclusively focused on investing in next generation commerce and retail technology. “Brands that grow too quickly and expand too widely run the risk of trivialization of brand equity through overexposure. If you try to engineer a path to scale for a brand that resembles that of a Google or Facebook without placing some constraints on growth for the sake of maintaining brand desirability and cachet, you can very likely implode these companies.”Another potential issue with these well-funded retail businesses, according to Hwang, is that they are actually very niche, which makes it hard for them to expand their customer pool.“Brands can grow rapidly at first because they are able to reach customers with whom their message resonates really easily at first without constraints of geography,” says Hwang. “But as the company scales, faces increasing competition and a diminishing pool of customers, the acquisition of each incremental customer becomes much more difficult and expensive to acquire. Brands will eventually reach a natural saturation point.”Hwang says that to continue stimulating growth, it is imperative not only to expand distribution, but to also build new geographic locations. Either way, warns Hwang, slope and velocity of growth will start to flatline. Additionally, most brands “disruptive” startups from the past decade are typically niche in size because a brand is the expression of a very particular opinion, other than those brands that are uniquely able to build a mass market culture around their point of view, like Apple.One venture investor in the consumer space agrees and says, “I think Nasty Gal was unable to handle its meteoric rise, growth-wise, as it wasn’t sure how to keep consistently responding to their customers. [I believe] also that Sophia was having difficulty personally handling that fast rise and while she made the right hires. It’s just hard to manage the niche the company carved out, product portfolio wise.”Courtesy of MACExactly how well Nasty Gal has been doing has been challenging to deduce, according to WWD, which last reported a company revenue of about $130 million in 2014. Meanwhile, Forbes valued the business last year at over $300 million. The brand’s outposts have been equally hard to gauge as Nasty Gal executives reportedly told WWD that “they were still learning from the two stores before determining next steps for the brand” when asked for a sales performance update over the past year.“It’s important to avoid inferring long-term growth from short term growth,” said Hwang, adding that until you can develop a better view for a brand’s potential market reach and size, they are often times better off pricing themselves conservatively and raising capital consistent with most likely exits. “If these businesses run the risk of becoming overly financed, they will fail to yield a return to investors despite having generated hundreds of millions in a year and having built a very successful business.”“Most businesses that can build online, should build online, but people are in the process of figuring out best means to expand through a number distribution channels.”-Natalie HwangDespite the growth of e-tail sales in the US, which Marketer Inc. estimates is increasing at a compound annual growth rate of approximately 14% over the next four years, topping out at $434.2 billion in 2017, there is clearly difficulty in the landscape. The challenge seems to be affecting those e-tailers who have been around for about a decade.“Many of these brands that originated online about 10 years plus ago were focused on leveraging online distribution to grow their companies very rapidly with the broad reach of the Internet and to build a modern brand with the use of digital tools,” says Hwang. “When they started they weren’t even thinking about distribution expansion. What we’re seeing these days is that the online and offline consumer are one and the same and what he or share cares about is the quality and ubiquity of seamless commerce. It will become increasingly important for brands to serve their customers through multiple touchpoints, create a compelling brand experience for consumers to buy into, and allow them to funnel their purchase intent depending upon their shopping need state through various channels and devices.”Experts say that despite the vast opportunity that continues to exist in the e-tail industry, more saturation means there are stiffer benchmarks to proving success, and investors can get cold feet if profits aren’t high within the first year of business. For fashion e-commerce companies that have been in existence for a few years, reinvention is another challenge, as consumers are always moving to the next platform, in this case those with proprietary technology assets.According to Hwang, companies like Uber and Etsy, which may spend a lot, but are also focused on re-investing it have the staying power she looks for when seeking the next investable idea. “The cost structure for how you scale up in e-commerce has proven every expensive because moth of the growth has been bought rather than organically acquired,” she says. “I like to see companies growing early almost by accident.” However, in a statement made in WWD, Nasty Gal executives say the move into bankruptcy will ultimately strengthen the company.“Our decision to initiate a court-supervised restructuring will enable us to address our immediate liquidity issues, restructure our balance sheet and correct structural issues including reducing our high occupancy costs and restoring compliance with our debt covenants,” Nasty Gal chief executive officer Sheree Waterson told WWD. “We expect to maintain our high level of customer service and emerge stronger and even better able to deliver the product and experience that our customers expect and that we take pride in bringing to market.”“The cost structure for scaling e-commerce can become prohibitively expensive if growth is bought. Paid acquisition is a necessary expense but can’t be the only thing that a company is good at.”-Natalie HwangAdditionally, the “Amazon effect” as it is known is also a factor in the new volatile e-commerce climate. According to recent industry figures, Amazon is the leading e-retailer in the United States with more than 107 billion U.S. dollars in 2015 net sales. While fashion is still not a main focus, it is reported, as of the fourth quarter of 2015, that the e-retailer claimed more than 304 million active customer accounts worldwide. “Due to Amazon’s global scope and reach, it is also considered one of the most valuable brands worldwide,” according to Statista. Clearly e-tailers looking for staying power are challenged more than ever to deliver a unique product at a competitive price.Either way, it seems one thing for sure, selling via the Internet is not going anywhere. Brands can no longer rest on their laurels of large audiences as a key to success and now must think multi-dimensionally in order to mimic the way consumers are actually shopping; which is everywhere.“Five years ago, the online and offline worlds were seen as separate and distinct, but truth of it is that the line between the two is a very hard one to draw. We live in a connected world,” says Hwang. “What has shifted is that the concept of shopping has shifted from owning things to buying into new ideas or values. A product or service is powerful because of its ability to impactfully connect people to those ideas or values and represent something about ourselves.” Belisa SilvaBelisa is an editor with more than 10 years of experience. Prior to SWAAY, she worked as freelance writer, covering lifestyle, fashion and beauty industries. Belisa was a Market Editor at Women's Wear Daily for five years, where she interviewed rockstar business women like Drew Barrymore, Jennifer Lopez and Iman. Belisa also contributes to Cosmetic Executive Women, where she highlights female executives making an impact in the beauty industry.