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

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

#1

Post by wenxun »

I just stumbled upon this piece on Business Insider "JustFab Raises $76 Million To Create The H&M Fashion Brand Of The Web". http://www.businessinsider.com/justfab-raises-76-million-to-create-the-hm-fashion-brand-of-the-web-2012-7

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. Didn't the VCs have to do the due diligence?

I didn't have any direct experience with JustFab. The victim was my girlfriend. Back in January or so, one of her friends emailed her a link to JustFab, then she bought a pair of shoes from www.justfab.com and never visit the website again. Only 8 months later, in early September she was appalled to find out that her credit card has been charged a $39.95 fee for the last eight months. Yes, $39.95 for 8 months, without geting anything from JustFab.

I then did a bit research on the internet. It turned out my girlfriend wasn't the only victim. Apparently JustFab works like this: once you buy something from their website, you become their "VIP member". Then you will have to log into their website between the 1st-5th of each month and click “Skip This Month”. If no action is taken (either skip this month, or cancel your account), they just charge you a $39.95 fee every month.

According to the Business insider article, JustFab "will generate about $100 million this year" in sales, I wonder how much of this $100 million are from people like my girlfriend who simply didn't read their entire 2,500 words Terms of Service and were unaware that they were charged $39.95 a month for nothing.

p.s. After JustFab CSR refused to refund, I decide to post this story again, hoping it will get upvoted to the frontpage of HN so that more people get to know what is really going on behind JustFab

pps. Anyone could just simply google "justfab scam" to see how many others have been victimized. It's outrageous such large scale scam got unnoticed.

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

#6

Post by davewiner »

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.

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

#7

Post by reitzensteinm »

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.

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

#8

Post by jonnathanson »

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.

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

#9

Post by tisme »

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.

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

#10

Post by caw »

jt11508 wrote: post #5

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

That was a bit shady if you're buying stock, but I've never had any trouble buying a groupon, getting a groupon redeemed, or getting one refunded. Overall I think Groupon is pretty legit for its customers, and businesses actually get paid (whether or not they can support themselves with the kind of clients Groupon brings in is another issue).

If you have to read mice type to find out the full T&C, there's something less than reputable about how you do business.

EDIT: Just looked at the FAQ on the site, they are up front with their 2 options. The shoes are $39.95 if you sign up for the VIP program, otherwise they're full price. So if you want the sale price, you've got to sign up for VIP. http://www.justfab.com/faq.htm#Q02

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