Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
Hip apparel retailer Karmaloop negotiates a tricky challenge: how to stay cool while growing up.
If there were a contest to pick the edgiest retailer in the Internet Retailer Top 500, Boston-based Karmaloop LLC would surely win. Founder Greg Selkoe didn’t launch the online store because he liked retail or had any business experience-what he did have was a real passion for urban street culture. That passion sparked the formation of a start-up company in 2000 that Selkoe since has built into an established apparel and accessories e-commerce site with a big following among the young and uber-hip.
And though Selkoe and his team have poured heart and soul into Karmaloop.com, packing it with content and innovative features that keep its audience coming back to see what’s new with the genre’s celebrities and artists as well as clothes and gear, there’s still a small part of Selkoe that’s surprised his start-up, which initially sold just five brands of T-shirts and sweatshirts, has become a $40 million business.
“It was a tiny little side project,” Selkoe says. “I never necessarily envisioned it being the big thing it is now.”
In 2000, the Boston native had a master’s degree in public policy from Harvard, a job as an urban planner for the Boston Redevelopment Authority and a fondness for all things streetwear. It was boom time for Internet start-ups, and Selkoe wanted a piece of it. Internet lore is rife with stories of business ventures launched in attics, garages and childhood bedrooms, and Karmaloop is no exception: its first warehouse was the basement of Selkoe’s parents’ home.
At the time, not many online retailers offered the kind of street garb Karmaloop sold, and the positive feedback from customers snowballed. “So in September of 2001, I quit my job and decided to try to make it a real business,” Selkoe says. “Then Sept. 11 happened, and I thought, what did I just do?”
When sales picked up a few months later, Selkoe’s first order of business was to find funding for the growing company. He cashed in his Roth IRA, sold his baseball cards and coins inherited from his grandmother, and sold stock he’d been given at birth. He got relatives and neighbors to invest, living on his girlfriend’s–now wife’s–salary.
“Any money I could get my hands on went into the company. We had huge credit card bills. There was a big period of not knowing if I could keep the lights on, and we got very close to going out of business a bunch of times,” Selkoe recalls.
Enter Frank Celeste, a local real estate broker and private investor. While visiting a Boston jeans store one day, Selkoe overheard Celeste in conversation with the store manager, encouraging her to expand the store, where he was a regular customer, and saying he’d consider investing in it. Selkoe ambushed Celeste for his phone number and upon Celeste’s exit from the store a few minutes later, his mobile phone rang with an invitation from Selkoe to visit Karmaloops’s office.
By that time, the company was renting space in Boston’s Piano Factory building, a loft building popular with artists. Celeste arrived to find clothing samples hanging in the shower stall, computer wires floor to ceiling and a staff swathed in street chic. It wasn’t a conventional-looking set-up for a potential investment, but Celeste was sold and ponied up more than $25,000.
“Greg had great determination and excitement,” he says. “He reminded me of myself at a younger age. Everybody around there had not only a spiritual commitment to the company, but a physical one-they were working seven days a week at that point.”
Celeste adds that Selkoe has “selective hearing-he never hears ‘no.’” It was something he’d learn firsthand over the next few years as Selkoe pitched him successfully several more times for emergency funds for inventory or to meet payroll.
“Sometimes sales didn’t come through and we were cutting it so close-but we somehow managed to do it,” Selkoe says of those early years.
Community of style
Helping that success along have been some innovative site features that bind Karmaloop more tightly with its audience into what Selkoe calls “a community of style.” That community gives fans ways to interact with the brand beyond buying products.
One is Karmaloop’s street team program, which promotes brand evangelism by giving registered reps a code to pass on when talking up Karmaloop on social network sites and personal blogs. Shoppers that use the code the first time they shop at Karmaloop get 20% off and the reps earn points redeemable in cash or merchandise.
Karmaloop also has embraced social networks with widgets and ties to social networks such as Facebook, Flickr and Twitter. Social networking, which Selkoe identifies as a fundamental part of Karmaloop’s marketing strategy, is handled in-house by Karmaloop’s marketing staff and led by marketing director Gio Chu and grassroots marketing director Dennis Todisco.
Customers also can bond with the brand and street culture in Karmaloop’s only store. On Boston’s trendy Newbury Street, it pulls in celebrities as well as loyal followers-recently, for example, the site featured a photo of rapper Kanye West shopping the store. The store plugs into Karmaloop.com with a kiosk allowing shoppers to order from the site’s larger inventory, with free shipping for anything ordered from the kiosk.
To keep its cutting edge sharp and distance itself from mainstream fashion-which the site dubs “mcfashion”-Karmaloop looks to many emerging brands and designers. It buys only small quantities from those brands, however. Selkoe found the process of securing 30 T-shirts from a small brand took about as much work as buying a large amount of inventory from an established vendor. It wasn’t economically feasible, he says, to warehouse those small quantities of inventory from so many small suppliers.
His solution was the Kazbah, a section of Karmaloop.com that features the work of new designers. Emerging brands can pitch their products to Karmaloop for review. If they’re among the 2% of products submitted that make the cut, they get their own page in the Kazbah section of the site, giving them access to Karmaloop’s 3.5 million monthly visitors. But the brands must do their own customer service and fulfillment. Forty-five brands are selling in the Kazbah currently, and they account for about 10% of Karmaloop’s sales.