Babystyle, the baby retailer, files for bankruptcy — victim of misguided investors?

updated

Babystyle, the Los Angeles retailer of baby and maternity products, has filed for bankruptcy after raising more than $146 million from investors.

Two years ago we were pointing to the worrying burn rate of the company, which also goes by Estyle. The company was losing money on its brick-and-mortar stores, but was still opening them up at a rapid rate — a time when more growth was happening online, not offline. The company kept raising money, including $6 million two years ago, and $11 million more last year.

Indeed, now criticism is pouring out from a former board member Frank Creer, an early investor, who says the later investors such as Oak Investment Partners and Global Retail Partners pumped ever more money into the company and forced it to open more stories, including three last year — leaving the company seriously overextended now that the economy has started to slow. VentureWire (subscription only) first reported the story this morning.

The story just raises more questions about the health of the investment community. Oak is a good example. Despite very mediocre results from investing in early-stage companies, the firm somehow managed to get investors to give it more money to embark on a strategy of investing into later-stage companies, even though this wasn’t Oak’s specialty. Firms have an incentive to raise more money, because they earn fees based on the size of the fund. So then, having raised a whopping, record sized $2.56 billion venture capital fund (also, see coverage here), Oak was forced to put that money to work — even as it was more difficult to find good companies to invest in. An abundance of private equity and hedge funds were already scouring to find the best companies. Beginning two years ago, I made numerous attempts to contact Oak and Washington State, one of the public investors in Oak to ask about their investment strategy, but we never did get a return phone call or email.

To be fair, investing in companies, and having them fail, is par for the course — it is going to happen to any investor. But the sad thing about this BabyStyle case is that it seemed so obviously misguided.

The company has laid off 14 employees and plans to close six of its 23 stores.

BabyStyle’s previous investors also include Arts Alliance, Digital Ventures, Goldman Sachs Group, Maveron, Mousse Partners Ltd., Primedia, Saints Capital, VSP Capital, Vulcan Capital and Zone Ventures.

When requested for comment, Gerald Gallagher, general partner at Oak Investment Partners, declined to talk this morning [Update: Gallagher has since gotten back to me and said he can’t comment]. Yves Sisteron, managing partner at GRP Partners, was out of the country and could not be reached for comment.

In a statement, chief executive Bob Kelleher blamed the company’s woes on “recent weakness in the economy, combined with poor performance from a number of unprofitable stores.”

Creer, a board member until last year, and a managing director of Zone Ventures, told VentureWire that the company almost reached profitability in 2004, before it started to focus on offline building:

According to Creer, other board members wanted to roll out more and more stores in a “ridiculously aggressive store rollout plan,” even though the ones that were already open were not profitable. When that didn’t work, he said, investors pumped more money into the company to open more stores…. “There was the same type of phenomenon in 1999-2000, where lots of companies were so dramatically over-funded that they never had the business model to be able to catch up with the funding,” Creer said.