Apr 15, 2015 · 6 minutes

In a well-reported piece in The Boston Globe this week, Taryn Luna pieces together, as best she can, some of the ill-fated business moves that led to the recent bankruptcy filing of Karmaloop, a streetwear fashion e-commerce company.

It’s a must read for anyone running or investing in an e-commerce company, and it serves as a case study of how quickly things can go awry in online retail.

As a brand, Karmaloop gained a ton of popularity among urban teens, skateboarders, surfers, and others at the fringes of the mainstream, a group the company’s founder Greg Selkoe described as the “verge culture.” Still one of the better known companies in the space, Karmaloop’s undoing isn’t the result of a mass exodus of customers, but a series of poor business decisions, awful financial management, and the company’s fall into “cult of the founder” territory.

If you don’t know the Karmaloop story, the company was built by Selkoe in 1999 from his parents' basement in the gritty and eclectic Jamaica Plain neighborhood of Boston. The company thrived selling T-shirts and other clothes that appealed to the young, urban, and fashion-minded. It eventually served as a conduit to bring designs informed by hip-hop and skateboard culture to the masses, and at one point earned $127 million in revenue.

Selkoe did a masterful job creating a national fashion brand in Boston of all places, that was ahead of its time in leveraging new technologies for Web payments, the evolution of social media, the growth of online video, and the use of virality as a sales tool. The company also helped a bunch of fashion entrepreneurs launch their small streetwear brands, making Selkoe a mentor to a second wave of e-commerce fashion startups.

However, at some point the wheels came off. As Luna explained in the Globe piece, the company made one bad move after another. The first misstep was Selkoe’s attempt to launch an MTV-like cable channel with Pharell Williams in 2008. Not a single show aired, and the futile project ended up costing Karmaloop $14 million.

The company also failed in an attempt to expand to other branded fashion sites. As Luna explains:

Karmaloop’s e-commerce expansion was also sputtering. The company launched and shuttered the Boylston Trading Co. site, an attempt to enter the high-end fashion world and sell more expensive clothing. Monark Box, a subscription service that mailed boxes of “exclusive” gear to members each month, also failed. MissKL.com, an attempt to grow Karmaloop’s female customer base, closed as well, according to the company.
Then, at some point, Karmaloop started messing with its vendors, many of them small fashion startups who flocked to be aligned with the brand, trying to catch some of Selkoe’s magic for themselves.

While some of the brands that Karmaloop sold through its site are well-known nationally, such as Vans, a large share were one- or two-person operations that hoped to be the next Karmaloop. All they need to do was to be loyal to Selkoe and they were brought into the Karmaloop family, a huge break for many of the clothing entrepreneurs.

The price for that loyalty may have been costly. Soon, there were murmurs from some vendors that Karmaloop, which served as the middleman collecting money between customers and clothing designers, didn’t pay the money rightfully owed to the companies.

And this is where Karmaloop really veered over the edge. The company was not doing as well as it had been years earlier and was struggling financially. By Luna’s account, sometime in 2013 it started a desperate search for investment funding, reaching out to at least 280 potential investors. But not a single backer decided to invest.

Meanwhile, Selkoe was telling the media, customers, and its vendors that everything was going great; by Luna's account, he was exaggerating revenue numbers in interviews and press releases, a practice Selkoe started in 2010. Some Boston blogs, taking Selkoe's news leaks for truth, even reported that the company was raising a large investment round and looking to IPO, even at one point comparing it to Wayfair.

And even as the vendors started to get more vocal in demanding their money, Karmaloop’s founder kept reiterating that a deal was in the works and that everyone would get paid. In one infamous email, Selkoe attempted to convey a sense that he not only had a business plan but was one of the guys. His profanity-filled email he doesn't even come close to sounding like the leader of a supposedly multi-million dollar business, which is actually what the company needed at the time; “Karmaloop had an amazing year in 2013 our best year ever and 2014 is going to be even better!" he wrote. "You say well if that is the case why the fuck can’t you pay us quicker you mutha fuckers?...You have my word everyone will get paid and we will fuckin kill it for you guys this year!”

Because he had built Karmaloop from nothing, had made some high profile friends, and knew how to talk the talk, it seems that Selkoe got away with being a bad businessman.

Part of the reason that Selkoe was rarely questioned on some of the questionable numbers and the marathon financing search was that he had gained a small level of cultural signficance nationally. But also, the Karmaloop leader had gained a bit of carte blanche in Boston through his efforts with an organization called Future Boston Alliance.

As the de facto leader of Future Boston, Selkoe became a bit of a cult figure among those desperately wanting to push for change that would appeal to, and keep  the massive college population in Boston, including expanding the hours of operation of the city’s less than 24-hour subway system and pushing back the time that bars and restaurants needed to stop serving alcohol. At one point, Selkoe even engaged in a public tete-a-tete with the longtime mayor of Boston Tom Menino.

And, like his initial role in mentoring new fashion brands,  there were some positives that the Karmaloop founder can take credit for related to the Future Boston Alliance. The group has been credited with being a major reason that the MBTA has expanded its hours of operation in Boston and that the office of the new mayor, Marty Walsh, is tinkering with the idea of piloting late night bar service in parts of the city. His civic work in Boston may one day be part of the greater Selkoe legacy.

But that legacy, crusading for policy change and building Karmaloop into a momentary e-commerce success, is in danger of being irreparably destroyed. Years of financial mismanagement and, it seems, a hope that the companies reputation would keep it afloat, led the company to a bankruptcy that has become a bit absurd over the past month with denials from Selkoe that the company was going bankrupt the same day it had filed paperwork and questionable rumors that people like Damon Dash and Kanye West were going to buy the underwater company.

Karmaloop, right now, is a mess. According to Luna's Globe article, the company owes a ton of money to streetwear brands, including$586,352 Huf Inc., $313,695 to 10.Deep Clothing Inc.,$156,919 to Vans $156,919, and $126,253 to LRG, among others. And that doesn't even include what it owes to the small vendors.

Whoever ends up buying Karmaloop in next months bankruptcy auction has a lot of work to do to build it back to an e-commerce powerhouse, if that can even be done. The first order of business should be to hire a chief executive that can not only save the company, but, quite possibly save Selkoe's legacy. The only way that happens is if Karmaloop's founder is not longer at the helm.

But, according to Greg Selkoe's Twitter feed, that isn't happening anytime soon:

https://twitter.com/Selkoe/status/581466461450969088