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Why was a scam company able to raise $76 Million Series B?

by wenxun on 9/30/12, 1:11 PM with 174 comments

• by reitzensteinm on 9/30/12, 1:36 PM

  So I went through their checkout process, and up until the credit card stage there is zero indication that it's a membership site (I read everything on every page).

  I've uploaded the credit card section here:

  http://i.imgur.com/3di93.png

  It says you'll be billed month per month on the right hand side under the VIP membership program, but I think it's pretty clear that the page is engineered to be misleading. It looks like a standard upsell, not a mandatory part of the purchase.

  They're relying on people clicking the accept terms and conditions check box without realizing that it's signing them up for the membership, i.e. it's the terms and conditions of the program, not the site in general.

  Terms and conditions boxes are common in the checkout process and nobody gives them a second thought. I'm not sure I would have caught this one if I went in naively.

  Clearly unethical, IMO.

• by tisme on 9/30/12, 1:37 PM

  Don't ask for a refund, go to your bank or CC company and charge back the 6 months. That'll hit them where it hurts. Little known fact about chargebacks: the merchant pays an administration fee, typically $20 to $50. Per charge!

  That is why the smarter scammers refund to everybody who complains, not refunding is plain dumb. This scam has been around for a long time, usually it's adult companies that sell you a 'free' membership with an age verification which comes with a pack of subscriptions tacked on for other stuff that you will never use.

  This practice of selling unsuspecting consumers a subscription with auto-renew when they think they're doing a one time transaction needs to be stamped out.

• by jonnathanson on 9/30/12, 1:37 PM

  This business model reminds me of those fly-by-night mobile subscription services from the early 2000s. The ones who'd make you think you were buying a single ringtone, and the next thing you knew, you'd been surreptitiously signed up for a $29.99/month subscription.

  I remember evaluating the books for one of those companies back in the day. It was wildly successful at the surface level. But if you dipped below the surface, you noticed that its biggest strategic weakness was "Breakage," i.e., the rate at which people eventually discovered they'd been duped and then cancelled their subscriptions. It turned out that the average subscription lasted 2 to 3 months, and nobody kept a subscription longer than 5 months. This basically meant that the company's entire business model was predicated on scamming new users at a rate quicker than its existing users could break away. While not a Ponzi scheme in the true sense, the model operates on a similar assumption. But the assumption is not sustainable in the long run.

  I look at a lot of companies these days -- especially all the companies in the pop-up sale business, the subscription-box business, etc., and wonder how many are following this playbook. And I wonder why VCs keep backing them. Obviously it's a fantastic way to earn tremendous growth up front. And, while the getting lasts, the getting is pretty darned good. But it's sad to think that legitimate startups may get turned down, or underfunded, for the quick buck and easy exit that can be made on this crap.

• by kevinalexbrown on 9/30/12, 5:09 PM

  To answer the question at hand: "Why was [this] company able to raise $76 Million Series B?" They make money.

  What's more concerning to me is that the coverage in TechCrunch[0] and Business Insider wasn't able to raise a modicum of doubt. If googling "JustFab" returns "Class Action Lawsuit" in the first 5 results, it would seem that the reporters either didn't do the absolute minimum required for effective journalism, ignored it, or were instructed to ignore it.

  We've all heard the "online journalism is broken" refrain, so I won't repeat it here.* I'll just note that if it's so far gone that googling the topic of interest is out of the question, this form of journalism is worse than I thought.

  [0] http://techcrunch.com/2012/04/26/fashion-retail-and-styling-...

  * Edit: some forms appear to be doing quite well, e.g. nytimes.com. I'd also point out that there are some online articles I've found on TC or TheNextWeb, or AllThingsD that were quite good.

• by lysol on 9/30/12, 2:14 PM

  Pretty terrible of Techcrunch to have a favorable article about it: http://techcrunch.com/2012/04/26/fashion-retail-and-styling-...

  That shit is poisonous to the startup sector, some people already think it's some kind of voodoo and this kind of thing doesn't help.

• by braveheart1723 on 9/30/12, 2:06 PM

  class action lawsuit - dated oct 2011 though - http://www.scambook.com/blog/2011/10/justfab-com-justfabulou...

  and some more people with similar stories:

  http://www.consumeraffairs.com/online/justfab.html

  http://www.scambook.com/company/view/146/JustFabcom

  http://forum.purseblog.com/the-glass-slipper/justfab-com-sca...

• by patio11 on 9/30/12, 3:45 PM

  This reminds me, more than anything else, of "co-registration" scams where buying a legitimate product on e.g. Digital River would get your CC details sent over to a seedy e.g. "buy our coupon book emails for $9 a month recurring. DigitalRiver went through with it because they offered DR a ~$30 CPA where DRs per-transaction cut was generally below $2. A few other publicly traded companies whose product teams must have at least a room temperature IQ started doing it, wsaying it was aboveboard and value-adding with a straight face, until the FTC said WTF.

  This just makes the coregistration first party.

• by trimbo on 9/30/12, 4:01 PM

  So basically this is the Columbia House[1] of shoes. That's not a scam, it's "a catch". When a consumer hears the pitch -- in the case of Columbia House, it was "get 8 CDs for 1 penny", in the case of JustFab it's "get any pair of shoes for $39" -- they should be asking what the catch is. An ungodly number of businesses involve catches to survive. How about cell phones? That new iPhone is only $200... but you have a 2 year contract and a $400 fee for leaving early.

  Columbia House and the Columbia Record Club were around for 60 years. I doubt this model will ever go away or be deemed illegal.

  [1] - http://en.wikipedia.org/wiki/Columbia_House

  edit: hey, there's a wikipedia article about this model

  http://en.wikipedia.org/wiki/Negative_option_billing

• by abyx on 9/30/12, 3:05 PM

  Yes. This is called "negative option billing" (http://en.wikipedia.org/wiki/Negative_option_billing). We (at BillGuard) see many people that fall into these kind of shady business models. It's pretty amazing that this is still legal and VCs are throwing money at it.

• by ALee on 9/30/12, 1:51 PM

  It probably tells you more about the VCs who invested rather than the company. The opportunity cost of where to deploy their money is likely higher these days and a VC who is investing in a fairly scam-ridden business is probably looking to capitalize on a quick exit.

  In this case, everyone knows the jig may be up quickly, so they're looking to expand quickly and leave before the known end.

• by nhangen on 9/30/12, 2:18 PM

  You would think that if any page explained how the program worked, it would be this one: http://www.justfab.com/how-justfab-works.htm

  but I didn't find a single mention of membership fees on this page.

  I'd heard a lot about this company, but had no idea what they were until now. Disgusting.

• by tzs on 9/30/12, 6:36 PM

  Could you ask your girlfriend how she didn't notice a large recurring charge for 8 months? I would like to know because that is a puzzle I deal with it work.

  We sell a software product and service on a subscription basis (not hidden like justfab...it is clear to the customer that they are buying a subscription--the product is kind of pointless without the subscription).

  Occasionally I find someone who bought years ago, and apparently stopped using the product. At least, I can tell that they have not obtained updates through our update servers for a long time. Yet they do not cancel the service. It just goes on re-billing them a few bucks a month, every month.

  I'm reluctant to cancel their accounts, because maybe they are obtaining updates some other way, such as downloading the latest version and installing it periodically, and their firewall is blocking the update checks. But I am always conflicted, because it could actually be someone that really just doesn't look at their credit card statement, and has no idea he is still paying us years after they stopped using our product.

• by chops on 9/30/12, 1:27 PM

  Thanks for posting this. This sounds quite the shady venture.

  Obviously, the next step for you, at the very least, is disputing the charges with the card company, seeing that the company is unwilling to refund the fees.

• by wenxun on 9/30/12, 1:21 PM

  p.p.s. Anyone could just simply google "justfab scam" to see how many others have been victimized. I'm surprised such large scale scam got unnoticed.

• by davewiner on 9/30/12, 1:35 PM

  It may be harder than you think to get the credit card company to stop the charges.

  http://uncrunched.com/2012/08/26/my-undead-credit-card/

  Like it or not they have a good business model.

  And the VCs probably don't care if they're ethical, as long as they get a good ROI.

• by mstefanko on 9/30/12, 3:51 PM

  My girlfriend had almost the exact same experience, such a scam. I was outraged when I looked through the site a year ago. In her opinion the shoes she did get we'rent even good quality, she gave them away. And when she called about the $40 charge that she knew nothing about, they told her she didn't want to cancel. When she asked why not, she was told they'd be getting some really cute shoes in next month and wouldn't want to miss out. Even after getting out of it, she was still called 3 times in future months to ask why she was unhappy with her purchase/and the membership she never knowingly signed up for. Can't stand JustFab or companies like it.

• by arbuge on 9/30/12, 1:28 PM

  No idea if this is a common experience but if you want a refund, just call your credit card company and do a chargeback...

• by alizaki on 9/30/12, 2:47 PM

  Shoedazzle pioneered this but had to get rid of the subscription and flip to a per-item charge because of scam complains.

• by calbear81 on 9/30/12, 4:02 PM

  Similar sites like ShoeDazzle recently removed the monthly subscription model so they will likely follow given enough complaints.

  Note that as someone pointed out below, the billing provides a credit so theoretically your girlfriend has $320 in credit at JustFab and she can go buy some one-price-fits all items which makes no sense to me at all (t-shirt at $39.95 wtf?).

  VC investments in LA tend to leverage the celebrity power of the backers since that gives access to a large audience and guarantees marketing/press coverage right off the bat.

• by antonej on 9/30/12, 6:35 PM

  Assuming for the sake of discussion that there are unlawful deceptive practices going on, either this company isn't getting the right legal counsel or is choosing to ignore it. Either way that sounds like bad news.

  There are plenty of legitimate businesses operating on continuity models (monthly charge, keep sending you stuff until you cancel), but they are regulated at both state and federal levels, and many states have laws with very specific requirements about what must be disclosed and how (e.g., CLEAR AND CONSPICUOUS disclosure on the checkout page, not buried in the site TOS, confirmation by e-mail, easy-to-find link to cancel, etc.). I'm not going to give an opinion on this particular site, but we did a meticulous 50-state review at eHarmony for just this reason, to head off any claims that consumers were somehow being misled about recurring charges. It has to be updated as states change or adopt new laws. The FTC also has jurisdiction but it's much easier to get the attention of state regulators and especially class action plaintiffs' lawyers.

• by Osiris on 9/30/12, 4:28 PM

  From reading the sign-up page, it sounds like each month you are billed you receive a 'credit' that can be used to purchase an item from the site.

  To me, the responsible thing to do would send an email to customers that have been billed for the month but have no yet redeemed their credit near the end of the month. Let them know they have a credit and suggest some items that they could purchase with the credit.

  At least that would give information to the customer so they are more aware of what's going on sooner rather than later and people may feel less that they are being 'scammed' because the site was actually trying to help them get what they are paying for.

  However, I agree that the signup page should make it more clear that it's a recurring charge. In fact, I would support a rule/regulation that required a user check a box that specifically states, "I understand that I am agreeing to a recurring monthly charge of $xx.xx".

  I know that I'd be pretty pissed if I saw a recurring charge show up that I wasn't expecting.

• by mrkmcknz on 9/30/12, 4:39 PM

  So I had some pretty angry thoughts after hearing this. I mean this is seriously unethical and immoral and I'll be extremely surprised if this approach stays after what seems to be an increasing amount of public pressure.

  The fact some well known VC's pile a ton of money into this does not surprise me one bit. The company is making money and to be fair they do explain it pretty clearly IF YOU GO LOOKING. What they're doing isn't illegal. However, more should and could be done online to protect people from bad practices such as these.

  CC companies do offer a form of protection through chargebacks, and over here in the UK whenever I have needed to dispute a transaction the mere mention of 'chargeback' usually kicks the retailer into shape.

  One company I have HUGE respect for is TeamTreehouse, I mean look how they manage a subscription service[1]. Best practice indeed.

  [1] http://cl.ly/image/0u0B1t313e3P

• by phaus on 9/30/12, 3:20 PM

  There are hundreds of websites that operate the same way. JustFab's membership fee is higher than any other that I've heard of, but there are tons of websites that are built around the idea that most people who shop online don't think to read the fine print. While in most cases the burden of responsibility should fall on the buyer, I think it's perfectly reasonable for a person to assume that when they buy a product from an online store, that they aren't going to be automatically enrolled in a membership program. I really hope that in the near future, people who run such businesses will start getting thrown in prison where they belong.

• by rmetzler on 10/1/12, 1:58 PM

  I sent this link to my brother who is an lawyer / attorney in Germany for intelectual property and competition/ antitrust law. Apparently justfab.de operates under German law. He said if another shoe retailer would be his client, there might be good chances to give them a really good kicking. I jokingly said, he should ask Zalando. But he refused and said a lawyer is not allowed to ask people to be his client. So if you run a shoe e-commerce site under German law and want to see this scam go out of business, you should NOT ask http://rechtsanwalt-metzler.de/

• by yaronsamid on 10/1/12, 5:05 AM

  This is classic case of deceptive "negative option billing" (http://en.wikipedia.org/wiki/Negative_option_billing). At BillGuard (http://billguard.com) we see 10's of thousands of people fall into these kind of shady business models and its our mission to end such deception and financial abuse. It's pretty amazing that this is still legal and that VCs are throwing money at it. Even the famed post transaction scam by Web Loyalty Group was backed by a very prominent VC. Money sells.

• by nck4222 on 9/30/12, 2:41 PM

  The page clearly says you'll be charged every month. It charges you and applies a credit, implying you can use the credit any time. It doesn't charge you and then not let you use the money.

  Is it misleading? Yeah slightly, except it says exactly what will happen with a bright pink numbered list. Did they create the program hoping some people will forget about it? Yes definitely. But, this a common tactic employed by any company with a monthly subscription.

  All this outrage is a little ridiculous.

• by khangtoh on 9/30/12, 7:36 PM

  This is the way most vertical ecommerce startups are operating. My friend just got a charge from a site that she bought a promotional item and turns out they're a subscriptiOn service and if you didn't sign in and check skip this month, they'll bill you without shipping you an actual good.

  Which also brings up a thought, remember that there was a used one credit card number thing a whole back, I'm betting this will get popular soon enough with all these things happening.

• by rwhitman on 9/30/12, 5:04 PM

  Why wouldn't a scam like that be worth a $76m investment? The business is obviously very lucrative.

  If a business is profitable in the hundreds of millions, as long as it is borderline legal, someone will invest in it. Thats the sad reality of how this stuff works.

  Though it is disappointing that Business Insider didn't take a few seconds to make an attempt at journalistic integrity, and do some research here rather than once again simply regurgitating a press release as some fluff piece.

• by carsongross on 9/30/12, 1:48 PM

  I thought Groupon only got 30M...

• by zxcjvk on 9/30/12, 6:12 PM

  In Poland they couldn't take any money for subscription, because all online transactions are done with instant wire transfer, not with credit cards. Buyer has to approve all transactions with sms code. You can define periodic transfers, but not by accident, and you can always stop them.

  There are companies (like pobieraczek.pl) that tried this scam but they had to take money through courts, and courts decided it was scam and buyers didn't have to pay.

• by tripzilch on 9/30/12, 7:59 PM

  Could you buy something and cancel your account immediately afterwards, so you just pay once, log in, cancel account, and that's it?

  Don't get me wrong, that does not make this right. It's just, I wonder, if their business model is based on these "zombie subscription fees" (as reitzensteinm so aptly called them) would they maybe lose money on actual, singular purchases? (or an unsustainably small profit margin)

• by flexxaeon on 9/30/12, 5:18 PM

  Normally you only see these types of action pages on adult sites (and Zynga games).

  All the important info is far away from the button as possible.

  Page is 'technically' letting you know that you're signing up for a subscription, yet the button only says "Complete Checkout"...nothing about 'Signing Up'.

  They went through some verbal hoops to not use terms like 'subscription', '$39.95 a month' and to keep the '$39.95' away from the word 'month'.

• by JimboOmega on 9/30/12, 8:45 PM

  I'd also like to note that you can't cancel online; you have to call them. There's a button to press to cancel, but it just takes you to a page asking you to call them.

  If you're intimidated by the thought of a CSR who will try to argue you out of cancelling, it gets easier to click "Skip this month" until you forget, and get charged.

  It's a very dodgy business model.

• by nikcub on 9/30/12, 5:12 PM

  It is a Netflix for shoes. The difference is that Netflix do not mention their price without mentioning 'per month', while JustFab never mention it.

  I went through the checkout process. If you were introduced to this site as a cheap shoe store, rather than as a 'netflix for shoes', you could easily be mislead.

  They are definitely in the grey area.

• by tzs on 9/30/12, 6:15 PM

  > It kept me wonder why a company with very questionable (I will try to avoid using the word "fraudulent") business model was able to raise big money

  You called them a scam company in the title and the body, so I am curious why the reluctance to use the word fraudulent too. What is the subtle distinction that I'm missing?

• by serkanh on 9/30/12, 3:54 PM

  I really don't understand how companies are able to do this, based on how stringent credit card processors are when it comes to chargebacks. With this type of misleading selling tactics i would expect JustFab to have chargebacks well above acceptable standarts of CC processors.

• by orionblastar on 9/30/12, 8:06 PM

  This sounds like the book of the month or CD of the month scams we would get in the postal mail. The first month is free and you buy discounted books or CDs but after that each month you buy one or they charge your credit card each month. Same thing but a web site.

• by brackin on 9/30/12, 7:36 PM

  Some of their investors don't seem very credible. Obviously investors they spoke to picked up on the fact that many of their customers complain about them. According to ScamBook "10,000 people viewed their article about 'JustFab Scam".

• by mulligan on 9/30/12, 7:52 PM

  A twitter search on JustFab also shows they have hired some spammers to pump their site. Lots of tweets like this: "Dеаr guуs, whеn will уоu lеаrn? Girls сan nеvеr hаve tоo manу shоes! Sincеrеly, Sign uр аt JustFab & stаrt buуin"

• by danvideo on 9/30/12, 3:58 PM

  checkout the wikipedia page: http://en.wikipedia.org/wiki/JustFab

  The criticisms are mentions as well as a lawsuit. Also note that this HN page is given as a source.

• by kkt262 on 9/30/12, 3:44 PM

  It does mention on their site that if you get charged the 39.95, you will get a member credit, which you can redeem for one style later on. So at least they are not just stealing.

  Was your girlfriend able to redeem her credits?

• by jeremyjh on 9/30/12, 4:45 PM

  If this is such a large scale problem, how do they still have merchant accounts? I would expect they would be flooded with reversals from the CC companies and banks.

• by clarky07 on 9/30/12, 3:58 PM

  While this is a bit scammy, I couldn't get past the part where she didn't notice this for 8 months. Come on people. Do a budget. Stop being stupid with your money.

• by Codhisattva on 9/30/12, 3:20 PM

  It doesn't seem out of the question that a funder could be just as dishonest as this company.

• by brianbreslin on 9/30/12, 4:39 PM

  Frank & oak has a similar confusing model on their hunt club

• by QuintinAdamis on 9/30/12, 2:57 PM

  As crazy as this is, this is an old technique from the adult video (Porn) industry. Recurring charges that also can't be disputed with either the company or the issuing credit card company.

• by hcarvalhoalves on 9/30/12, 10:16 PM

  Revenue is king. Ethics are optional.

• by jdh on 9/30/12, 8:39 PM

  Biased answer but with some facts: I'm an investor in the company, and many here on HN know me personally. JustFab is not a scam, and I would not be involved with it if it was -- indeed it's a spectacular and very consumer friendly company that I'm proud to be a part of and I think will be a great success.

  This comment thread has been quick to conclude that it is a scam, on some fairly sketchy evidence. While I don't dispute that the author's friends experience might be true, the fact that someone didn't notice that they were signing up for a subscription product is somewhat undermined by the fact it took them 8 months to realize the charge was appearing on their credit card. It's possibly not a person who pays attention to details.

  If you want to understand the degree to which the company's customer base understands and is in love with the company, check out their facebook page and the consumer engagement. Here's a pair of shoes they posted for a sneak peak this week: https://www.facebook.com/photo.php?fbid=10152125991230508...

  90 Comments, 4,800 likes in a few days -- for a commercial promotion. Read the comments on this or any of their threads -- no one is bitching about being scammed or not understanding they are members of a suscription site -- they LOVE it.

  Justfab has hundreds of thousands of subscribers. A new subscriber who joined last month will, given churn rates, be likely to be a paying subscriber for more than two years. They will make purchases in more than four months in their first year. They understand the premise: a personal shopper has selected a boutique for them at the beginning of the month, all the products are great value, and their obligation is to come and check the boutique that has been prepared. If they don't want anything that month, they just click skip and they're done.

  Now, many of you would clearly prefer a world where you would not have to log in to say "no thanks" -- and that world is available to you at the mall. Justfab shoes are quality identical to shoes twice their price at the mall, because they have crushed the traditional retailer and supply value chain. But to deliver the value that the customers want, they need to be very thoughtful about costs.

  The #1 challenge in ecommerce is customer acquisition. Pretty much every company has to spend more to acquire a customer than they will make in margin on the first transaction, so you're dependent on a lifetime value of purchases to make money. The reason few outside of Amazon have been able to make this work, and even Amazon (and it's bought businesses like Zappos and Diapers) make very little money is because you keep having to reacquire the customers to get their business... think of people just clicking through those google ads at the top, whether they've been there before or not.

  The idea of the subscription model is to get customers in a regular habit of checking in. When they commit to that, Justfab can in turn commit to pricing for the quality they provide that would be unheard of anywhere else. Justfab's typical customer isn't wealthy but likes to look good, and can't afford to just disregard price, and JF is the place they find a style/quality/affordability combination that works for them.

  To be clear: as stated, JustFab is on track to do $100M+ in sales this year, from hundreds of thousands of subscribers who check in every month and understand exactly what they're getting into. The site has a very high net promoter score, a return rate that is less than half of Zappos.

  As a general rule, if a customer signs up for a subscription product, doesn't check in and calls in because they got charged, we explain the system and try to keep them as a customer, but if they want a refund they will generally get it. People who don't call for 8 months I'm less sure about what the standard policy is.

  If I go to the homepage, the biggest call to action for me (it's customized so not everyone will get the same) is "Buy one get one free sale happening now. JOIN TODAY." If they were trying to trick you, would the call to action say Join?

  As has been pointed out, when you join by making your first purchase, the purchase page which others have linked has two key things:

  * A very clear description that you are signing up for a subscription program. This says plainly and in bold type, in the same font size as everything else on the page: "If You Do Not Make A Purchase Or Skip The Month By The 5th, You'll Be Charged $39.95 For A Member Credit On The 6th. Each credit can be redeemed for any JustFab style on the site."

  * A check box that says you accept the terms of VIP membership. This box is in a clear and large font, uses the word membership, and is not opt-out -- you have to proactively opt-in.

  I don't see how a reasonable person could argue that this is a scam or a trick. Not only are the terms presented in plain english and large fonts, the site has a huge number of passionate and loyal customers.

• by zxcvvcxz on 10/2/12, 6:10 PM

  Because the scam works.

• by datn on 9/30/12, 4:54 PM

  Worked for Zynga!

• by jt11508 on 9/30/12, 1:33 PM

  There's a big public one of these called Groupon too...

• by Mvandenbergh on 9/30/12, 1:39 PM

  This looks pretty clear in the FAQ on their website. Every month that you're a member, you have the option to buy one of that month's items at a discounted price. If you don't take that option, you get a credit to buy additional items in subsequent months. If you don't want to sign up for the membership then you can select that option at checkout (and pay more).

  Did it take your girlfriend 8 months to notice this recurring charge on her statement?

  I have a story about forgetting to cancel my online newspaper subscription. Look for that on HN soon!