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Illustration: Aïda Amer/Axios

On-demand merchandise startup Teespring is profitable (and has been for a year) after seven years in business, but it didn’t come easy — the path there included layoffs, CEO changes, a recapitalization that slashed its valuation to a mere $11 million, and other tough business lessons over the last couple of years.

The big picture: Teespring's saga inverts the usual garage-band-to-billionaires startup story. The company began as a Silicon Valley darling, attracting the early backing of Y Combinator, other top investors and media attention. Then the trouble began.

Teespring was founded in 2012 by Walker Williams and Evan Stites-Clayton after they crowdfunded t-shirts to commemorate a beloved bar that was shutting down near their college.

  • Teespring, which let users design t-shirts and sell them at cost or for a profit, participated in the Y Combinator startup accelerator program in 2013, jumpstarting its fast rise.
  • In 2014, it raised a total of $55 million via two rounds from top VCs like Andreessen Horowitz and Khosla Ventures. The latter round gave the company a valuation of a reported whopping $650 million.

But beneath headlines that Teespring was minting millionaires, the reality was more worrisome: a majority of its business came from a small number of entrepreneurs generating sales via Facebook ads.

  • Users were designing 120,000 new products every day, but “the incredible growth wasn’t necessarily being reflected in the revenue,” Chris Lamontagne, who joined in 2015 and recently became CEO, tells Axios. The average users didn’t have the know-how and tools to turn those design into sales, he says.
  • Teespring’s business naturally took a hit as Facebook’s ads became more expensive and competitors with lower costs began to attract its sellers, according to Lamontagne and former execs.

In mid-2017, after multiple rounds of layoffs, the company underwent a painful recapitalization while raising new funding.

  • Teespring raised a new $5 million, mostly from existing backers Hydrazine Capital and Khosla Ventures, but also cut its valuation from a reported $650 million post-money in 2014 to just $11 million, according to the Wall Street Journal.
  • “We were focused on channel diversity and profitability from 2015 onwards, but our burn was too high and our early efforts to diversify fell flat,” Williams tells Axios. “We were bullish that the company still had a future, but getting investor buy-in was tough, and in the end, the only viable option to keep the company going was the recap."

At the same time, the company was already working to shift away from its dependency on a small number of sellers and Facebook ads.

  • It created what it calls its “Boosted Network,” a suite of tools and services to help users advertise and sell the products they design. This includes listing the items on marketplaces like Amazon, eBay, Wish, Etsy and Walmart, for which Teespring adds a small fee to the cut it takes from sales. Boosted Network quickly rose to generate nearly 40% of Teespring’s sales in the first few months, according to Lamontagne.
  • Teespring is also expanding in new directions: it inked a partnership with YouTube to help its popular video stars design and sell merchandise, and it has teamed up with JD.com, Tmall and Rakuten to sell products in Asia.
  • Of course, these initiatives also came with growing pains, such as a few incidents of inappropriate shirt designs cropping up via its service.

Today, Teespring is a smaller but healthier company. It has moved beyond just selling t-shirts, offering 150 different items, and says that this year it will reach $1 billion in sales since its inception. Both Williams and Stites-Clayton remain on the company's board, though they ceded their executive roles in early 2018.

The bottom line: Finding quick success as a startup doesn’t always mean a company has built a solid and sustainable business.

Go deeper: Reflecting on My Failure to Build a Billion-Dollar Company

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