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Birchbox’s investors are giving the startup a $15 million lifeline

It’s cold out there for unprofitable startups.

Jamie Schneider Hosts An Evening With Birchbox Photo by Rich Polk/Getty Images for Birchbox
Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.

It’s cold out there for unprofitable startups. Lucky for beauty startup Birchbox, its existing investors are continuing to back it.

Unable to secure additional investments on good terms from new investors, the six-year-old company has raised a new $15 million investment from its current investors to shore up its balance sheet amid a cash crunch. Birchbox’s investors include First Round Capital, Accel Partners and Viking Global Investors.

The new money is coming in the form of a convertible note — a type of loan that eventually converts to an equity stake — and is meant to hold the company over until it can become cash-flow positive. The startup is also securing a separate credit facility of several million dollars.

The new funds follow two rounds of layoffs Birchbox carried out so far this year. The startup laid off 15 percent of its staff in January and another 12 percent in June, saying it needed to get to profitability quicker than planned because of a shift in how investors are valuing growing, but money-losing, startups.

“Obviously, 2016 has been a very hard year from many perspectives,” Birchbox co-founder and CEO Katia Beauchamp told Recode in an interview last week.

“But the idea is to be in control of our own destiny, and now we’ll be able to become profitable very soon and going forward,” she added. She declined to provide a specific timeline for reaching profitability on a cash flow and Ebitda basis, but insinuated it would likely happen this year.

Birchbox was founded in 2010 by Beauchamp and her Harvard Business School classmate Hayley Barna as a way to bring beauty and makeup samples into the home. By 2011, the company already had generated something of a cult following, with tens of thousands of customers paying $10 a month for deliveries of four or five samples at a time.

The thinking was that customers would discover new products and would buy some full-sized, full-priced versions from Birchbox as a result. Today, 35 percent of revenue comes from the sale of full-priced products from; the startup would like to see that number grow. The company also operates a brick-and-mortar store in Manhattan but has shelved plans for more stores.

Sources close to the company say Birchbox does about $200 million in annual revenue. Sales grew more than 20 percent in the first half of 2016, one of these people said.

Up until the layoffs, Birchbox was widely viewed in e-commerce circles as a big success story, having built a sizable, fast-growing and differentiated business on relatively little capital during its first four years in existence. But in 2014, it raised $60 million in a deal that valued it at around $500 million, giving it the cash to market itself and hire at levels that ultimately proved unsustainable.

The cost-cutting and rush to reach profitability could be viewed as a strategy to dress the company up for a sale. Beauchamp denied this was the impetus. She said the effort to put the company on stable financial footing just gives the startup more options, including the potential to raise new funds on better terms in the future.

Different sources point to different areas where Birchbox stumbled since its $60 million investment. Some say the subscription part of the business hit headwinds faster than people inside and around the company were expecting, as customers tired of the deliveries or deserted to competitors such as Ipsy. Others point to inefficient marketing spending resulting in customer acquisition costs that spiraled out of control.

Another common refrain is that the startup did not hire top, experienced executives soon enough to support the first-time founders. Birchbox hired former Sephora Canada head Philippe Pinatel as president and chief operating officer in November. A spokeswoman declined to comment on these explanations.

In the interview, Beauchamp acknowledged that the startup has work to repair its image both outside and inside the company, where her approval rating post-layoffs has sunk to 27 percent according to the employer review site Glassdoor. But she insists that this slug of cash will be the turning point that puts the startup back on the right path.

“September is our six-year anniversary and then it’s the holidays and that’s a really big time of year for us,” she said. “That’s where the focus is.”

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