The Fab.com story: 10 tips on when to change your game

Jason Goldberg is founder and CEO of Fab.com, a private-sales site focused on design. Prior to founding Fab, which began as a gay social network, Jason founded Socialmedian and Jobster. In a prior life, he spent six years working 100 hours a week for Bill Clinton in the White House. This post originally appeared on his personal blog.

Last October, I wrote a blog post titled 57 Things I’ve Learned Founding 3 Tech Companies. At the time I had founded two startups and was a year into the third, a gay social network launched as Fabulis that was later rechristened Fab. A few weeks ago I followed up that post with an essay on the difference between year 1 and year 2 of your startup. Now that we’re relaunching Fab under an entirely new business model, I figured it might be a good time to share what I’ve learned about the stay/go/pivot decision to help others facing the same critical choices.

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I have run this particular gauntlet three different times:

• At employment website Jobster, which was founded in 2004, raised $48 million in VC funds, employed 150 at its peak, and sold a song in pieces in 2009 and 2010.
• At social news service socialmedian, a shoestring operation with just me, a few developers, and $800,000 in angel money that was acquired only 11 months after launch for $7.5 million.
• And currently at Fab.com, which spent 11 months as a mashup of Facebook, Yelp, TripAdvisor, Eventful and Foursquare services for the gay community as we iterated in search of some traction -– now being reinvented as a private sales community for design lovers.

The pivot strategy we’re following has plenty of precedents. As Greg Tseng pointed out in January, tech leaders like YouTube, Twitter, Groupon and PayPal all began life in different incarnations. It also has admirers like superstar investor Mike Maples, who lectured a Founder Institute event in October about having the courage to dismantle a mediocre business and rebuild it into one that has the potential to hit a homerun (this is a must-watch video for any/every entrepreneur btw).

Be warned startup guys and gals, pivoting isn’t easy. It is a huge decision to stop doing what you’re doing, throw away tons of code, risk fragile user and customer relationships, and essentially start over. And the word “pivot” itself is a leading candidate for overused term of the year. Pivoting is not a strategy unto itself. You need to really know where you want to go, why you want to go there, and have a plan for how you are going to get there.

But how do you know when it’s time to take the plunge and change your game? In our case, which may be instructive to others in our shoes, there were three compelling reasons to change the game.

Fab’s Pivot Decision

First, we couldn’t do the math. Even though Fab attracted 50,000 members in our first three months, we only doubled in size over the next five, and our updated projections showed that we would never pass the $10 million revenue mark with our business model. We had raised $1.25 million in angel financing and an additional $1.75 million from VCs with the expectation that we would be building a $50-$100 million business, and we clearly couldn’t deliver. Our team signed up for building a big business, we are passionate about building a big business, but the math no longer added up.

Second, our market had shifted. Gay rights progress over the past year had a positive impact on the gay community but a negative impact on the demand for our services. With developments like the repeal of Don’t Ask Don’t Tell, the court victories over California’s Proposition 8 gay marriage ban, the Obama administration’s tacit rejection of the Defense of Marriage Act, and the anti-bullying It Gets Better Project continuing to integrate gays into the mainstream, we saw a diminished need for a gay Facebook or a gay Yelp or a gay Foursquare or a gay Groupon.

Third, our maniacal focus on customer input drove us to a new opportunity. From selling daily deals we discovered that the idea of a design site had legs. We found that out when we introduced a Gay Deal of the Day program that sold more than $40,000 of goods in the first 20 days alone. The biggest sellers weren’t gay-focused, nearly half of the buyers were straight, and the response showed that there was a demand for good design available online at affordable prices – sexual orientation notwithstanding.

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Suddenly we heard the siren call of a new and better business idea loud and clear. The market for good Design is a $100 billion industry that cuts across multiple product categories. Our team has a collective passion for design. There is no web-native e-commerce brand today for design products, particularly at discount pricing, so we could fill that void. We get social and we get great UX, and there’s a legit opportunity to replace consumer online shopping experiences that are uninspiring and overwhelming with experiences that are curated, social, exciting and addictive. We had already proved we had the skill and taste to find merchandise that people wanted. Better yet, we still had the vast majority of the funds we had raised in the bank.

So we moved fast. We decided to change our business on February 23, got our board of directors’ approval on March 1, and are starting to roll out the new Fab.com today – just two weeks later. I want to emphasize the importance of speed in such a decision. In our case, we didn’t want to spend $1 more, let alone $millions more pursuing an idea that we were no longer convinced could succeed, especially when we saw a much bigger and better opportunity in front of us.

Stay? Go? Pivot?

All of the steps that lay behind our decision to transform Fab were rooted in the lessons learned over seven years in the startup world. Here, based on our experience, are the top 10 reasons to alter course.

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1. If you can’t get traction after one year, switch gears and work on something different. Particularly if you’re building a consumer e-business, you can tell pretty quickly if it’s going to fly or flunk.
2. Don’t get bogged down in something just because you’ve been doing it. There are plenty of other fish in the entrepreneurial sea. Go catch the one that looks like it’s swimming faster than the turtle you’ve been riding.
3. Be willing to go in a completely different direction. Remember, YouTube started as a video dating site. No one is going to shoot you for abandoning an idea that didn’t work.
4. Consider your options well before you’re down to your last dollar. That will give you the time and resources to make a mid-course correction if necessary. It’s better to change when you’ve still got over $1million in the bank like we do.
5. Do the math at least once a month. You can’t fix it if you don’t know it’s broken.
6. Don’t get seduced by your own ‘brilliant’ idea. It may have sounded good on paper, but you need to be objective in evaluating the results.
7. Change courses because you want to, not because you have to. If you’ve done your homework in a timely manner and you see the writing on the wall (see #5), you’ll have time to figure out where to go next.
8. Get your board on board. They invested in you. They’ll want you to do whatever you’re convinced can give them the greatest return.
9. Think like an investor. What can you do that has the greatest chance of delivering 10 times the investment you (or they) make in your business?
10. Ask yourself the following six questions to determine whether to regroup:

• If we could do anything for the next year, what would it be?

• What are we most passionate about?

• What are our customers telling us?

• What can we (realistically) be the best at?

• If we were to use our limited resources for anything, what would we spend them on?

• What will create the most value for our shareholders?

Some people say great entrepreneurs just make it happen. I can tell you from experience with my own companies and in serving as an advisor to other startups: that is rarely true. Good businesses need inspiration as well as perspiration. If at first you don’t succeed, try again. The next time, you might get it right.