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General Catalyst's David Fialkow: How I made the decision to invest in Rue La La

Posted by Scott Kirsner  August 23, 2010 11:00 AM

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Sunday's Globe column focused on Rue La La, one of the most successful e-commerce companies to come out of Boston since... well, ever? The company was acquired last year for a sum that could hit $350 million if the company meets certain milestones, and it'll hire more than 100 people in Boston this year.

In working on the column, I talked to David Fialkow, a managing director at General Catalyst who invested in Rue's predecessor company, SmartBargains, and then also ponied up more when Rue CEO Ben Fischman pitched him on a management buy-out and restart. Rue was born in 2008 (the actual company name is Retail Convergence) and sold to GSI Commerce the following fall. Fialkow called it "a monster return." General Catalyst and other investors put $25 million into the revamped company (about half of it to purchase the assets from the prior group of investors, and some to fund the business re-start).

Other Rue backers included David Mugar; Breakaway Ventures, the investment firm of former Reebok chief executive Paul Fireman; and New England Development, the real estate firm run by Stephen Karp and Steven Fischman (who happens to be Ben Fischman’s father.) The investors got $180 million back about 18 months later — half in GSI stock, half in cash. The earn-out lasts through fall 2011, but they could receive another $170 million.

It was interesting to hear Fialkow list the challenges he thought Rue would face; we spoke last week.

1. "Would I as a customer want to get pushed e-mails, and would people tell their friends? Would it be obtrusive, or would I like it?" In 2008, when Rue launched, conventional wisdom said that no one was paying attention to e-mail marketing.

2. "Would the top brands be willing to play? The site had to have today's fashions, not yesterday's." SmartBargains hadn't been working with high-end labels as consistently as Rue La La would.

3. "The operational dynamics. Can you take orders online, can you pick, pack, and ship, and can you handle customer service and returns?"

4. "The competitors." Fialkow knew the most about Gilt Groupe — since it had been co-founded by Alexis Maybank, who had been an entrepreneur-in-residence at his firm earlier in the decade.

Issue #2, Fialkow said, was his biggest concern: "The business wouldn't work unless you could get the best brands to play with you." And yet another issue was whether customer acquisition costs would chew up the company's profit margins.

But Fialkow had been a co-founder of the Vacation Outlet, a last-minute discounter of travel packages, so he had a sense that creating similar urgency around purchasing prestige-brand apparel could work. And he had confidence in Fischman, who had worked at General Catalyst as an entrepreneur-in-residence, and earlier had started Lids, the mall-based hat retailer.

I asked Fialkow if he felt Rue might've sold out too soon. He didn't think so, of course, and Fischman told me the company hadn't been hunting for a sugar daddy when GSI expressed interest in Rue: "We were politely ignoring all the calls." The acquisition, in his view, was more a way "to globalize the business in a really dominant way. It wasn't an exit strategy, but a way to ensure long-term success."

Manhattan-based Gilt, Fialkow noted, has taken far more in venture capital funding than Rue: about $83 million so far. One of Gilt's big investors is Waltham-based Matrix Partners, where Nick Beim is on the board.

Which company will turn out to generate the best returns? "Time will tell," Fialkow said.

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About Scott Kirsner

Scott Kirsner was part of the team that launched Boston.com in 1995, and has been writing a column for the Globe since 2000. His work has also appeared in Wired, Fast Company, The New York Times, BusinessWeek, Newsweek, and Variety. Scott is also the author of the books "Fans, Friends & Followers" and "Inventing the Movies," was the editor of "The Convergence Guide: Life Sciences in New England," and was a contributor to "The Good City: Writers Explore 21st Century Boston." Scott also helps organize several local events on entrepreneurship, including the Nantucket Conference and Future Forward. Here's some background on how Scott decides what to cover, and how to pitch him a story idea.

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