Greg Selkoe’s Bad Karma

He built the nation’s hippest online clothing company into a $127 million e-commerce titan. When Karmaloop filed for bankruptcy in March, everyone wanted to know: How did it all go wrong?

By 2004, Karmaloop’s website was attracting half a million monthly visitors, had a tribe of 300,000 email subscribers, and was coming off three straight years of growth. The company’s marketing team had grown to 3,000 reps who passed out fliers and stickers at nightclubs, at concerts, and on the streets. Having helped Selkoe realize his grand idea, Regan says he was eager to start his own company, so the two parted ways.

Selkoe’s management style had already begun to alienate people. In fact, many former employees say the CEO was running Karmaloop like it was his personal fiefdom. With Regan now gone, Selkoe needed someone to lean on for advice and to help run Karmaloop’s day-to-day operations. So he turned to the company’s general counsel (and later, chief operating officer), Chris Mastrangelo, a blond Boston University law school grad who looks like a choirboy but is characterized by several former employees as a vindictive boss. (Mastrangelo could not be reached for comment.) Selkoe admitted to me that Mastrangelo may have been the wrong person for the job, but stressed that he was “a smart, loyal guy” and “very talented…. But he also had the job where you had to kind of be the jerk, right?”

When it came to hiring people, Selkoe tended to gravitate toward friends of friends, girlfriends and boyfriends of current employees, and twentysomethings who reflected the company’s hip streetwear image. Karmaloop seemed to live in a perpetual youth bubble, powered by an ever-changing cast of recent college grads who drew big salaries and sought to change the world, one ironic T-shirt at a time. Selkoe and his wife took their favorites out to dinner and welcomed them into their home, creating an extended Karmaloop family. “It was an assembly line of young hipster kids who just wanted to be cool,” says a former senior-level employee, “and Greg was the head of all that. A hipster kid, but not a kid anymore, [who] still wanted to relive the glory days like the football-team captain.”

Many of the hired hands were remarkably unqualified. One former top-level employee, who had more than a decade of buying experience at the corporate and boutique level, was stunned to learn a couple of weeks into her job that her immediate charges had no idea how to use a spreadsheet. “These guys were managing budgets of hundreds of thousands of dollars and did not have that formal training at all,” she told me. “Basic retail math was something I had to go over and over again.” When she tried to help them learn how to create and read spreadsheets and apply financial modeling to purchasing decisions, it didn’t go well. The younger employees as well as the executive team quickly tired of her schooling, she says, and within a few months, she was shown the door.

Mastrangelo offered little in the way of managerial stability to counterpoint his Peter Pan CEO. He had never run a corporation and seemed to foster a culture of high turnover. Former employees say it was his way of scaring the young and inexperienced team into performing. “Chris was the worst,” a former high-level tech-team member says. “He would see someone talking on their cell phone in the hallway and start yelling at them. It’s like, this guy’s a senior developer, his kid’s sick, so he’s out in the hallway talking to him.”

Selkoe likes to say that he valued loyalty in his employees above all else. Former staff members, however, claim that in reality the most important quality in a good Karmaloop employee was quiet obedience. The senior member of the tech team told me that when he dared to question Selkoe in public, “[Selkoe] became visibly angry and he told me there was going to be a consequence as a result.” He also said that Selkoe “would frequently pick on one person. Publicly flog them for lack of performance or failure to meet his goals. Not too many people disagreed with him.”

A survey of some 70 reviews of Karmaloop on Glassdoor, a website with more than 6 million company critiques, reveals a pervasive lack of professionalism: “CEO & COO have no idea how to run a company,” one reviewer remarked. “They are constantly yelling and slamming doors and seem to think that threats and nasty emails is [sic] how to inspire their workforce.” Many entries noted that there was constant turnover, that Karmaloop failed to provide any training to employees, and that upper management was notorious for disregarding data. “The company is run by ‘egotistical’ executives who are smart intellectual people, but who are not business savvy—these people do not have enough technical or financial experience,” another commenter said. “Decisions are made on a whim and without proper analysis.”

However, not all of the reviews were negative; many Karmaloop employees said that they thrived at the company and were grateful to Selkoe for giving them their start. “I have had the opportunity to work with Greg Selkoe and have learned far more about business and how running a business is so different and hard compared to what you thought,” wrote one anonymous commenter. “He works as hard as anyone in the company, he has always listened to me.” Todd Kane, former digital director for Karmaloop, told me that Selkoe is “a man of value, integrity, and one of the biggest hearts on the planet…. I had nothing but a life-changing experience that has continued to resonate with me since that point.”

Still, the business model was shaky: Karmaloop had a policy of paying its vendors as slowly as possible. Selkoe explains that his main adviser, the late Sam Gerson, of the Gap and Filene’s Basement, always cautioned him to hold onto his cash: “He would say, ‘Don’t pay the vendors as much as you can, because there’s only enough money to go around in the business. And you make money on the pennies.’” Meanwhile, vendors were shipping merchandise and not getting paid, while Karmaloop held onto the money as long as possible. At Karmaloop, “Whoever was doing the buying would have to just keep on ducking or making excuses for nonpayment until there was finally cash in the door from another investor,” one former employee, now a streetwear industry insider, says.

However, in a counterculture business such as streetwear that “attracts prophets, messiahs, scumbags, and people who want to live on the fringe,” the insider continues, there tends to be little litigation. The brands selling merchandise on Karmaloop’s website suffered in silence. After all, Karmaloop gave many smaller, independent clothing companies a major platform to sell their wares and raise visibility. No other website offered such exposure. “They were,” the insider says of Karmaloop, “the Walmart of streetwear.”

 

In 2008, Karmaloop and its army of customers—not to mention the $30 million or so in revenue on the company’s books—drew the attention of New York’s billion-dollar equity firms. E-commerce had recovered from the initial dot-com bubble in 2000 and was roaring once again: Amazon’s share price had rebounded to more than $70, and the company was on the verge of buying Zappos for $1.2 billion. Every major fund was scrambling to throw money at online companies: Just scale it and the earnings will come. Karmaloop—with more customers, more revenue, and more page views than ever—looked from the outside like an excellent bet. “The phone wouldn’t stop ringing,” Selkoe says. “[People would say], ‘What you’ve done is amazing, no one could have done this, plus you’re making money.’”

An $8 billion venture capital outfit in Manhattan called Insight Venture Partners emerged from the pack, valuing Karmaloop at $70 million. “Let’s throw some gas on this thing,” Selkoe was told. The firm committed $30 million for 40 percent of the company and two out of five board seats. But Insight spent $25 million of its investment to buy out existing investors, including an $8 million payout to Selkoe himself. This left a feeble $5 million to fuel the rapid growth that the VCs expected of their newest acquisition.

That kind of deal—one in which little money is used to fund expansion—is somewhat unusual in venture rounds, says Jeffrey Rayport, a Harvard Business School faculty member who coined the term “viral marketing” in 1996 and developed the first e-commerce graduate course in the United States: “Usually, early-stage institutional investors want to put their money to work in the company.” Rayport says that Insight’s partial buyout of Selkoe’s early investors suggests that the firm saw them as potential sources of misaligned interest. It also may have implied that Insight believed Karmaloop’s ambitions wouldn’t require much new capital, or believed the business would generate lots of cash on its own. In fact, neither assertion turned out to be true.

One would’ve expected Insight to professionalize the operation. Instead, Selkoe says, the firm encouraged him to take bigger and bigger risks. Selkoe says that, eager to grab market share and maximize short-term returns, Insight worked with him to expand, even if that meant creating a flash-sale site, Plndr, that was soon driving 40 percent of Karmaloop’s revenue and ostensibly cutting deep into the company’s margins. “Basically, the idea was, we were going to grow,” Selkoe says. “And so no one was concerned. We were purposely eating into things to grow this part of the business.” Insight did not respond to Boston’s repeated requests for comment.

With millions in the bank, Selkoe launched a moon shot. Karmaloop already had a hit YouTube channel with millions of viewers. Why not build a Karmaloop empire on cable TV?


Rachel Slade
Rachel Slade Rachel Slade, Editor of Boston Home Magazine rslade@bostonmagazine.com