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Monday, November 26, 2012

Building Start-Ups via Stars\' Ties to Fans

Building Start-Ups via Stars' Ties to Fans

J. Emilio Flores for The New York Times

Brian Lee and Jessica Alba at the offices of The Honest Company in Santa Monica, Calif. It sells eco-friendly baby supplies.

You might have heard Jessica Alba on daytime TV talking about her new e-commerce company, which sells diapers and other baby supplies, or seen Kim Kardashian pitching her online shoe store in the tabloids.

The man behind the companies, Brian Lee, is far from a household name. Yet in the world of tech start-ups, he is an emerging force.

Mr. Lee, a lawyer turned entrepreneur, has a simple formula: partner with a celebrity that fans associate with a certain product, whether stilettos or baby supplies. He first did it in 1999, when he cold-called Robert Shapiro, O.J. Simpson's lawyer, and persuaded him to join him at his first start-up, LegalZoom, for creating your own legal documents.

Hiring a famous face to represent your brand is the oldest marketing trick in the book. But Mr. Lee is doing it with an Internet twist. He uses celebrities' social media connections with fans, coupled with recent innovations in e-commerce, to sell things in ways that were not possible just a few years ago.

The Honest Company, Ms. Alba's start-up selling eco-friendly baby supplies, has raised $27 million from investors, including Lightspeed Venture Partners. ShoeDazzle, Ms. Kardashian's shoe company, has raised $66 million from Andreessen Horowitz, Lightspeed and others. But despite this investment, it has recently struggled, replacing its chief executive, laying off employees and raising bigger questions about the new breed of subscription e-commerce companies.

E-commerce is going through a shift, as retailers move beyond publishing print catalogs online to creating new business models for the Web. According to the National Venture Capital Association, venture capitalists invested $2.2 billion in e-commerce start-ups last year, almost three times as much as the year before and more than they have invested since the first Internet boom, which created Amazon.com and eBay.

Mr. Lee's companies tap the latest e-commerce trends, including selling monthly subscriptions, using software algorithms to determine personal style suggestions and eliminating middlemen by designing products in-house and selling them directly to consumers.

“Given the choice between shopping at a boutique or warehouse, if the styles were right, which would my wife choose?” Mr. Lee said, describing the strategy behind ShoeDazzle and Honest. “A large group of women would choose that kind of curated boutique.”

At Honest, customers sign up for monthly deliveries of diapers festooned with anchors or hearts as well as items like shampoo and detergent, each formulated in-house to reduce chemicals. Ms. Alba conceived the idea, along with Christopher Gavigan, former chief of the nonprofit Healthy Child Healthy World, and turned to Mr. Lee for a business model.

When ShoeDazzle was founded in 2009, it was the first of a flurry of subscription e-commerce start-ups. The shoes, generally $39.95, are suggested based on the results of a style quiz the customer takes. They are designed by ShoeDazzle and manufactured at the same factories that big shoe brands use.

But ShoeDazzle has been struggling with that model, and analysts say that could foreshadow problems for its many imitators, which, in addition to Honest, include Birchbox for cosmetics, Wittlebee for children's clothing, JustFab for shoes and handbags, and BeachMint, which has sites for jewelry, T-shirts, skin care, shoes, home décor and lingerie. Earlier this month, Walmart joined the trend, introducing a monthly subscription box of food called The Goodies Company.

“Subscriptions were the hot trend in the last year, but I think some of that energy has really flattened,” said Sucharita Mulpuru, an e-commerce analyst at Forrester.

While subscriptions have worked well at companies like Amazon.com and Diapers.com for necessities like toilet paper and diapers, shoppers might find it harder to justify a recurring credit-card charge for colorful suede booties.

ShoeDazzle switched to a nonsubscription model this year, so shoppers log on whenever they are in the mood to shop instead of receiving monthly boxes. In September, the company replaced its chief executive, Bill Strauss, with Mr. Lee. He laid off 20 of its 220 employees and cut expenses like corporate apartments. Both Honest and ShoeDazzle are capital-intensive because they design, store and ship their own inventory.

“We lost our way,” said Jeremy Liew, managing director of Lightspeed Venture Partners. “But there's real value in this company and customers love the product.”

Mr. Lee said ShoeDazzle would approach $100 million in revenue this year and become profitable next year. Honest is not yet a year old, but its founders say it has proved popular with shoppers. Mr. Lee is the right person for the job, Mr. Liew said, because he has a Hollywood sensibility that Bay Area executives lack.

A version of this article appeared in print on November 26, 2012, on page B1 of the New York edition with the headline: Building Start-Ups Via Stars' Ties to Fans.