Why can a scam company raise $40 Million Series C + $76 Million Series B?

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 2012, 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. Then 8 months later, in September 2013 she finished her Master study in the US and returned to her home country. 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 getting 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" without your knowledge. 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 article published on BusinessInsider, JustFab "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.

[1] http://venturebeat.com/2013/09/26/justfab-sews-up-40m-to-become-global-fast-fashion-empire/

[2] http://techcrunch.com/2013/09/26/justfab-has-raised-another-40m-led-by-hong-kongs-shining-capital-to-take-its-fashion-subscription-commerce-model-to-asia/

ps. This is a re-post of my last year's post [3], hoping it will get upvoted to the frontpage of HN so that more people get to know the shady business JustFab does. Apparently VCs don't do due diligence any more, as long as scam companies like JustFab can bring them money.

[3] https://news.ycombinator.com/item?id=4592778

This is the same thing. It may feel scuzzy, but they do tell you this up front, and while they hope you forget, it isn't a scam, it is just preying on the uninformed.

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

Obviously the VCs did diligence - however they must have considered the shady business as an acceptable risk factor.

I think the answer to what you are asking is many businesses start in the grey zone. Recently many folks made huge bank with recurring billing with no notice. Ring tones and internet games both went that path. Justfab seems to be breaking into a new industry with that same business model.

You should consider that most people consider this nonsense the fault of the purchaser, 'buyer beware'. Gym memberships are a classic example of this.

They can raise money because it works, it's legal if not ethical or tasteful, and in their particular case ... they've figured out how to scale enormously.