Ecomom is liquidating and shutting down; investors are stunned | PandoDaily

By Sarah Lacy
On February 14, 2013

The story of Ecomom keeps getting more stunning and more tragic. PandoDaily has learned that the company has just dealt its investors yet another blow. Just two and a half weeks after founder and CEO Jody Sherman stunned the tech community by taking his own life, Ecomom will be shutting down and liquidating all its assets — starting tomorrow.

Ecomom’s investors were informed of this via email this afternoon. The email was shared with us by more than one investor, and we’ve printed it in its entirety below.

We’ve spoken to multiple Ecomom investors this evening — and in the weeks since Sherman’s passing — and all expressed continuing shock over the rapid deterioration of the company. Sherman had a history of straight dealing with investors, both with Ecomom and other startups, say many sources. No one seems to be able to wrap his or her head around what happened and everyone is asking the same question: “What happened to all the money?”

Making matters worse: The story keeps changing.

Initially, investors were told that the rest of the management team would be stepping up to continue to work hard to build Sherman’s vision. In a letter to investors dated January 31, co-founder Emily Blakeney and president Marcus Nucci wrote, “While we are saddened by recent events, we are proud that ecomom will continue to serve the larger community of parents that have turned to us for help over the past years….All of us at ecomom are committed to continuing this legacy.”

Then just days after his death, they were told that the bulk of the staff was getting laid off.

Other press reports said the step was sudden but necessary or the company would be insolvent within weeks. Investors we spoke with at the time were left wondering where the company’s recent $5 million in funding went– not to mention an additional $1 million in debt and revenues of several million dollars per year. With just 28 people on staff, the numbers didn’t seem to add up.

Now, it seems that investors weren’t the only ones who didn’t understand the depths of the company’s deteriorating financial situation. Even with the cuts executives and the board made weeks ago, the company apparently still didn’t have enough resources to last a full month. Investors have complained that calls and questions to the Nucci have gone largely unanswered.

All many of them have is the information in this letter sent earlier this evening (emphasis added by me):

Dear Ecomom Investors: Since the tragic passing of our co-founder and CEO, Jody Sherman, the management team and board of directors have been working together in the interests of the whole Ecomom family including employees, shareholders, creditors, and our community of moms.  Immediately after the news, the company and the board worked to preserve cash, assess the financial state of the business, and determine best next steps.  The ultimate goal was to find a way to realize the dream that Jody and Emily pursued of creating a trusted destination that helped make it easy for parents to make good purchasing decisions for their families and homes. After a review of the state of the business, it became clear that the management team and the board had tough decisions to make.  Everyone was surprised to discover the precipitous increase in losses over the past 2-3 months.  The company’s liabilities appear to be greater than its assets and this financial burden makes it difficult to continue down the current path.  In light of recent events, given the $1 million securitized bank note and the company’s dwindling cash position, the board has been in discussions with the bank to determine the next steps.  Without a current prospect of further cash infusion into the company, the bank will likely ask to sweep most of the company’s cash very soon and take steps to liquidate the remaining inventory and sell assets to pay off the bank debt.  At this point, it appears that the company has no other choice than to wind-down the business. Given the current liabilities, the only way to keep the company afloat would be with a white knight contribution of $2-3 million to pay down liabilities and to pivot the business to a more profitable business model that has been considered.  We do realize that Jody Sherman had many friends who believed in his vision and still hope for a more positive outcome, but we realize that this outcome is not likely at this point.  If you have the interest and capacity to help with the situation or know of another person or firm that may be able to, please reach out as soon as possible. We are waiting to hear back from the bank as to what steps they would like to take next.  The team remains committed to finding a way to continue the business, but in all likelihood, Ecomom will begin the wind-down process with shutting down the site tomorrow, Friday, February 15th. Again, please keep this information confidential and do not share with non-investors. Sincerely, Marcus Nucci Interim President

It may seem callous of investors to share this email with us, but frustration has run high as investors continue to seek answers and the questions only seem to mount. The hope was that by sharing what they knew, we could help them get to the bottom of it.

Astoundingly, almost no investors we’ve spoken with blame Sherman or suspect fraud or foul play. Many of the investors were long time friends of Sherman’s and have seen him through previous entrepreneurial ups and downs. He has a history of being upfront and blunt about what’s working and what isn’t, and owns up to his own mistakes and shortcomings pretty readily.

Indeed, in reading nearly a dozen past emails to Ecomom investors, Sherman comes across as incredibly transparent and frank. In one email, he wrote of the site breaking on Black Friday 2011 and the implications for the company. He was honest about where they went wrong, what they learned from it, and how they bounced back over the holiday season, beating their annual revenue estimates. Overall, the last investor communication before Sherman’s death painted the picture of a growing company — and one that had just secured millions more in funding.

There’s one explanation that I’ve heard of what could have happened. Two sources with knowledge of the situation told us independently that someone within the company made a purchasing mistake that was “disastrous.” It was characterized as dramatically over-stocking on inventory that the site couldn’t move, and that was a big enough misstep that it put the company in a precarious cash position.

One source tells us that Sherman told at least one investor about this the Friday before his death, but that he also said he had a plan of what to do. We’re told that he said the plan would involve layoffs, but the company would be OK and he was still upbeat about the future. We’re told the board also knew about the pending layoffs, which were to take place the following week.

While several investors I’ve spoken with still find this answer less than satisfying, it appears to be the only answer out there right now.

On a personal note, the decline of Ecomom hasn’t been an easy story for me to report. Sherman was a friend of mine, and like most people I was shocked and deeply shaken to learn of his death. Like most of the investors I’ve spoken with, I can’t imagine him doing anything unethical to tank the company that he so hoped would be his lasting legacy in the startup world. After reviewing several confidential investor documents, I still don’t believe he did.

But at the same time, I can’t imagine a problem at the company that his friends and investors wouldn’t have ultimately been understanding about. Failure is a part of this world, and Sherman had been in it long enough that he certainly knew that. One of our last conversations was floating in a pool in Mexico and reminiscing about the dot com crash, and the failures that so many great entrepreneurs experienced back then.

In reporting this story, we’ve worked hard to gather as many facts as we can, and see correspondences in black and white before reporting them. Many people will speculate beyond what we’ve written here; we’ll leave that to others.

Anytime a company closes down it’s unfortunate. But the case of Ecomom has been just been devastating for everyone involved.