By Jillian D’onfro From Business Insider

Four years ago Gilt Groupe was the hottest startup in New York — Here’s what happened

Four years ago, luxury flash-sales startup Gilt Groupe was one of the buzziest e-commerce startups in the world, with hundreds of millions in revenue and an IPO expected any quarter.

In the words of one former employee, “We were really hot s**t.”

Now, the buzz is gone. Gilt Groupe has downsized and is struggling to maintain growth, its executive team has turned over, and it still hasn’t gone public — and probably won’t any time soon, as a new $50 million cash injection this week suggests.

What happened to Gilt? And what’s the future for the company?

In its hyper-growth years, the company overextended itself and lost focus, a number of current and former Gilt employees told Business Insider. Now, under new leadership, Gilt has returned to its roots in deep-discount fashion and is trying to re-accelerate growth and achieve profitability.

The rocket ship launches
Gilt Groupe launched in 2007 as the brainchild of serial entrepreneurs Kevin Ryan and Dwight Merriman, who have started many companies over the past decade, including Shopwiki, MongoDB, and the parent of this publication (both are still Board members of and investors in Business Insider).

Ryan got the idea for the company from Vente-Privee, a successful online fashion retailer in France. He recruited tech and fashion veterans Mike Bryzek, Phong Nguyen, Alexis Maybank and Alexandra Wilkis Wilson to the founding team. At launch, Gilt conducted “flash sales,” selling a limited number of luxury designer items at steep discounts for fleeting periods of time. It became an immediate hit.

The site nearly crashed when Gilt held its first sale for Christian Louboutin shoes, marked down 50%, because tens of thousands of hopeful shoppers flooded the site at the same time. This “flash-sale” model became popular among e-commerce companies, and Gilt Groupe became the industry leader in the fashion segment.

Gilt grew crazy-fast by offering people discounts to refer their friends. Because of that first-of-its-kind viral sign-up program, Gilt smashed its first year revenue projections seven times over. Sales continued to skyrocket — from $25 million in 2008 to $425 million in 2010.

At one point, the company was hiring a new employee every day. Investors drooled over the sales figures, and Gilt raised $83 million within its first three years. Flush with cash, co-founder and then-CEO Kevin Ryan launched a bunch of new verticals, expanding from its original mission of discounted luxury goods to categories such as food (Gilt Taste), local deals (Gilt City), full-price menswear (Park & Bond), and travel (Jetsetter). Subsidiary site Gilt Japan launched in 2009.

In May 2011, the company raised a massive $138 million funding round that valued it at $1 billion.

The good times end…
The company’s golden sheen started to wear off by early 2012. Gilt’s blockbuster IPO, rumored as early as 2009, remained elusive. The company struggled to reach profitability and laid off 10% of its employees, 90 people, in 2012. It scaled back its less successful businesses, like newer darlings Taste and City, shuttered Park & Bond, and put Jetsetter up for sale.

Gilt’s diminished stature manifested itself in ways small and large. For regular employees, it meant that the Chobani yogurt and Pellegrino in the kitchen were replaced by bulk snacks and seltzer. Michelle Peluso, a Gilt board member since 2009, took over as CEO in February 2013.

As one former employee describes it, 2009 through 2011 were Gilt’s wild teenage years; the company was going through a growth spurt and trying to figure itself out. With flash-sales competitors like RueLaLa and HauteLook elbowing for attention, the company dove into new verticals that weren’t good fits for Gilt’s core business.

“We were one of the biggest startups in New York, but we all realized that we had over-extended ourselves,” Peluso tells Business Insider, reflecting on the company’s downsizing measures.

In the rush to expand, Gilt neglected its special recipe. Full-price retail, travel, and food were sucking resources from Gilt’s core categories — discounted women’s fashion, men’s and kid’s fashion, home furnishings, and local deals — so Gilt killed Taste and Park & Bond and sold Jetsetter to Travelocity for a”big profit.” (Neither company disclosed the terms of the deal, but travel site Skift reported at the time that Gilt got much less than it originally wanted.)

Dream deferred
For a long time, Gilt was expected to IPO at any moment. That’s no longer true.

This week, the company raised $50 million in new capital, a sign it will stay private longer. One reporter, Re/code’s Jason Del Rey, described the fundraise as a sign Gilt Groupe was “in limbo.”

In fact, all signs point to the dreaded “down round,” meaning that Gilt raised money at a lower valuation than the $1 billion at which it reportedly raised $138 million in 2011. Down rounds can take a hit on employee morale or make founders’ stakes worth much less.

Peluso says Gilt Groupe will go public when it finally sees consistent growth and (preferably) profitability.

It has neither right now.

Although Peluso says Gilt was adjusted-EBITDA-positive for the first time in 2013, it’s not yet profitable by traditional accounting standards. (Adjusted-EBITDA doesn’t include stock based compensation, depreciation, or amortization.)

Flash sales companies in the public market have also been struggling. After a couple of spectacular years of growth, parenting site Zulily has been tossed around on the stock market and lost more than 60% of its market value this year. French flash-sales site pioneer Vente-Privee, meanwhile, decided to shut down its US arm last fall.

Still, the Gilt team has always brushed off the oft-cited idea that flash-sales as a category — both online and off — is doomed to inevitably slowing growth.

“For decades now people have said that the offline discount goods market was tapped out, and yet if you look at virtually every major brand, most of their growth is coming from their discount stores. Look at TJMAXX, it continues to grow quarter-after-quarter, year-after-year, decade-after-decade,” current board member and CEO from 2008 to 2010, Susan Lyne, says. “The idea that flash is tapped out doesn’t make sense. It’s just an online execution of what has worked offline.”

What’s next
Today, Peluso is focused on accelerating the growth of Gilt’s remaining verticals.

One of the company’s top priorities is making sure Gilt is constantly offering deals that its 9 million young, affluent members will be excited about. Lux fashion brands don’t want to ditch excess inventory at the dirt-cheap prices they did during the economic downturn, so Gilt now sells more private-label goods and is starting to test other services, like exclusive product launches.

One of Peluso’s other missions is finding ways for Gilt to fund its future by becoming more efficient.

In the company’s hyper-growth phase, Gilt put more much effort into gaining market share and acquiring new customers than making sure its various systems and processes worked as tightly as possible.

“When I first joined Gilt, I thought it would grow into one of those giant companies, like a Google,” a former employee who joined Gilt in 2011 says. “But in order to get there, it would either need crazy-fast growth (like Uber kind of growth), or an Amazon-like efficiency, with a really structured, rigid process. Unfortunately, I don’t think we achieved either.”

Figuring out how to make Gilt leaner has been an on-going process for Peluso.

She told Business Insider that Gilt saved millions of dollars last year by photographing new products as they came in instead of on a pre-determined schedule. It plans to shut down its Brooklyn photo studio and move it into its Manhattan headquarters. Gilt also condensed customer service to one office, down from three.

In early 2014, it partnered with Seattle outdoor gear flash-sale startup The Clymb to manage its supply chain processes in Gilt’s giant Kentucky warehouse. Clymb pays Gilt by volume, so Gilt snags a bit of extra revenue through the deal. (It’s a similar model to Amazon’s third-party fulfillment services.) Gilt has been trying to transform itself from money-losing to cash flow break-even for years, but Peluso says she expects that it will near break-even in 2015 (though Gilt declined to name the quarter).

Two years into her reign as CEO, Peluso also plans to grow the company by doubling-down on marketing and international efforts to counteract the slowing growth Gilt experienced at the end of 2014.

“Being in a really competitive environment, I think we missed the boat on spending-up on marketing,” she says. Gilt studied its competitors and discovered it spent a much smaller percentage of its revenue in 2014 on reaching current and future members (79% of its revenue came from repeat customers in 2014). Gilt plans to ramp up its spending again this year.

It also needs to pay more attention to its international customers. Gilt had always sent out its email blasts at 12 pm EST, forcing people in Asia to wake up in the middle of the night to shop the deals. Last year it finally started sending out different email blasts to different regions at different times.

It’s working on other ways it can tailor sales to its international audiences, too, like finding local designers or giving different geographies first dibs on brand sales that traditionally do well there. Right now, international is roughly 20% of Gilt’s business, up from 15% in 2013.

Although most marketing dollars will be spent in the US, Gilt Groupe has also begun to ramp up localized marketing efforts abroad, too. Thanks to a push around Single’s Day — China’s biggest shopping event in November — Gilt saw record sales in China, up 1110% year-over-year.

With the new funding to bolster marketing and international growth, Peluso says an IPO is likely still on the company’s path — eventually.

It has been a tumultuous seven years for this young company — a rocket-ride launch, flameout, and stumble, followed by a long, more disciplined recovery. But as with all successful startups, there is now a cool new service, brand, and company where there was once nothing. And Peluso is optimistic about what’s to come.

“We strongly believe we can get back to stronger growth, particularly as we find efficiencies and spend-up marketing” Peluso says. “There’s still a lot of fun ahead for Gilt.”
IMAGES:
Michelle PelusoRommel Demano / Stringer / Getty ImagesGilt CEO Michelle Peluso
Gilt Taste launched in 2011 and shuttered in 2013
Gilt GroupeWayback MachineGIlt’s homepage in 2011, via The Wayback Machine
Here’s how Gilt’s site looks today
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