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Ill-fated ventures led to Karmaloop’s fall

As auction looms for streetwear giant, future role for its founder is uncertain

Greg Selkoe dreamed up a company that fused fashion with pop culture and technology in his parents’ basement in Jamaica Plain.
Greg Selkoe dreamed up a company that fused fashion with pop culture and technology in his parents’ basement in Jamaica Plain.Globe Staff/File/Globe Staff

Greg Selkoe was in his 20s when he dreamed up a company that fused fashion with pop culture and technology, the kind of cutting-edge business you would expect to find in New York. He happened to be dreaming from his parents’ basement in Jamaica Plain.

Selkoe didn’t stay there long. His company, Karmaloop, became the go-to online destination to buy streetwear — a mix of skate, surf, hip-hop, and other fashions — that connected customers outside America's fashion meccas with up-and-coming designers. No one did that when Selkoe started in 1999 and Karmaloop’s business grew steadily, eventually producing annual sales of $127 million.

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Selkoe wasn’t just selling clothes. He was doing business with pop figures from singer Pharrell Williams to artist Shepard Fairey. Selkoe’s company was throwing big parties at clubs from New York to Las Vegas.

But behind the scenes, Karmaloop’s once-booming business began to unravel.

The company launched a series of ill-fated and expensive business ventures, including a failed $14 million attempt to cross over into television, and sales slumped. Over a two-year period, Karmaloop approached more than 280 potential investors, hoping to infuse desperately needed capital into business. They all turned the company down, according to the bankruptcy filing.

The financial strain finally forced Karmaloop to file for bankruptcy protection in March. The company intends to reorganize and continue on after an auction of the business scheduled for next month, although what if any role Selkoe would have in a reorganized Karmaloop is unclear.

“At the end of the day you need to have strong financial controls,” said Sucharita Mulpuru, an e-commerce analyst with Forrester Research. “The fact that [Selkoe] let it get out of hand and didn’t listen to the warnings or have the right people in place to identify the warnings, speaks to his inability to manage the business.”

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Selkoe disagreed with Mulpuru. He said the company had successes over the years and Karmaloop’s financial teams managed resources to the best of their ability.

Bankruptcy court documents and interviews with vendors portrayed a company that fell deeper and deeper into debt over the last two years and eventually owed more than $100 million. At the time of the filing, Karmaloop owed more than $19 million to vendors alone.

It’s hard to pinpoint exactly when the company started faltering, but Karmaloop and Selkoe had exaggerated annual sales of the private company in media interviews and news releases for the business as far back as 2010, based on figures in court documents and provided by Karmaloop officials for this story.

When asked about the discrepancy, Selkoe, responding to written questions via e-mail, said “many retailers” cite gross numbers publicly and those figures are considerably larger than net sales. He declined to be interviewed.

Karmaloop’s television project was among its most expensive mistakes. The company began streaming its own video programming in 2008 and two years later Selkoe told the Globe he intended to cross over to television with a Comcast cable channel, KTV. At the time, Selkoe touted a lofty goal to recreate the magic of MTV in its early days.

He had hired Williams, the musician and producer, to serve as the chief creative officer and tapped a Hollywood heavyweight, Katie McEnroe, to lead the charge. In all, Selkoe spent $14 million on content, consultants, parties, and other expenses related to the project, according to court records.

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Karmaloop founder Greg Selkoe and his wife, Dina, in 2008, the year the Boston-based company began streaming its own video programming.
Karmaloop founder Greg Selkoe and his wife, Dina, in 2008, the year the Boston-based company began streaming its own video programming.Globe Staff/File

But KTV never aired on a single television screen and Comcast didn’t give Karmaloop the channel, court records show. In the bankruptcy filings McEnroe is listed as one of Karmaloop’s top creditors and is owed more than $900,000.

Karmaloop’s e-commerce expansion was also sputtering. The company launched and shuttered the Boylston Trading Co. site, an attempt to enter the high-end fashion world and sell more expensive clothing. Monark Box, a subscription service that mailed boxes of “exclusive” gear to members each month, also failed. MissKL.com, an attempt to grow Karmaloop’s female customer base, closed as well, according to the company.

Selkoe, asked what, in retrospect, he might have done differently, wrote that he wouldn’t have started “ancillary sites that caused us to stray from the company’s core business.”

“None were bad ideas, but it was too much too quick,” he wrote. “The funding market changed quickly — some sites were gaining traction, but they were true startups and needed to burn cash for a while and a bunch of things came together that made that unsupportable.”

Karmaloop started to experience cash-flow problems two years ago and worked with firms to find investors to inject new capital into the business, according to the company’s bankruptcy filing. The Raine Group contacted over 120 different groups over the course of six months. Karmaloop tried again in early 2014, this time through Consensus Advisory Services, which approached 160 potential investors. None wanted to put money into Karmaloop, according to court records.

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Last spring, Karmaloop took out loans to make it through the back-to-school and holiday retail seasons that lay ahead. By October, the company had breached financial terms with its creditor and defaulted on its loan, according to a bankruptcy document.

At the same time, Karmaloop’s sales were sliding. Revenues in 2014 amounted to $80 million, about a third less than sales the previous year, according to Brian Davies, whose firm Capstone Partners was hired in December to serve as Karmaloop’s financial advisor.

In a bankruptcy filing, Davies said his firm wasn’t able to fully implement a new business strategy in time for the holiday season, normally among the company’s most profitable periods.

Late last year, Karmaloop began exploring a sale, court documents show. Consensus reached out to more than 150 potential buyers, but no deal was reached. To reduce costs, Karmaloop cut its staff by more than 20 employees in the last four months, Davies said. At the time of the bankruptcy, the company had a workforce of 88 full-time employees, down from a staff Selkoe said in a 2013 interview exceeded 250.

Meanwhile, the money Karmaloop owed vendors was adding up. Consumers also went online to complain about orders that never arrived and poor customer service.

Since December, the company has implemented a drop-ship retail strategy for all of its product lines, according to court documents. Customers placed orders online and paid Karmaloop, but the products were shipped directly from the vendors. Karmaloop then wrote checks to the suppliers. But some of the checks stopped coming.

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At the time of the bankruptcy filing, Karmaloop owed well-known streetwear brands Huf Inc. $586,352 and 10.Deep Clothing Inc. $313,695. The company owed $156,919 to Vans and another $126,253 to Lifted Research Group, commonly known as LRG, among others.

But vendors selling products on another Karmaloop retail website called Kazbah, which had been using a drop-ship system for some of its business for several years, said payment problems dated back even further. Kazbah specializes in small brands and hard-to-find merchandise.

Terry Thompson, owner of the Boston company Live Individuals Clothing Co., said he hasn’t received a check from Karmaloop in over a year. He said the company owes him thousands of dollars for merchandise he shipped customers through Kazbah. He took a part-time job at a factory to get by, he said,

“It’s money tied up that we could be using,” Thompson said. “We can’t come up with any new products or anything.”

RMRD Clothing of Tucson started selling T-shirts, hats, and other apparel on Kazbah in November 2013. Owner Derrek Petroff said he, too, hasn’t been paid in a year and is now owed nearly $10,000.

Before the bankruptcy, vendors who reached out to the company said the response was always the same: We’re working on it and the money is coming. Selkoe sent out a colorful e-mail with the same message to Kazbah vendors over a year ago, using profanities and urging them to be patient.

Karmaloop spent a lot of the money that came in from those sales to pay expenses to keep its own business running, Davies said. A number of vendors sued Karmaloop seeking payments in recent years.

In late March, Selkoe sent Kazbah brands an upbeat e-mail stating that all payments owed from purchases made before the bankruptcy filing would be dealt with during the bankruptcy process. He said money owed on sales from new orders would be paid each week.

But smaller vendors may find it hard to ever recoup their losses. Davies said the small sellers are very low on the list of creditors to receive any proceeds from the sale.

“The little guy is always the one who is going to be screwed in bankruptcy proceeding,” said Marshal Cohen, chief retail analyst with the NPD Group of New York. “They can’t afford to not be paid the way big companies can.”

As part of the bankruptcy process, an auction for Karmaloop will take place in mid-May. A minimum offer, known as the stalking horse bid, has been set at $13 million. Selkoe said he plans to remain at the helm after the reorganization.

“I am still gonna be owner no matter what we do.” Selkoe wrote on Twitter after the bankruptcy filing. “I am Karmaloop!”

Karmaloop timeline

1999: Greg Selkoe founded Karmaloop in his parents’ basement in Jamaica Plain.

2005: Karmaloop opens its first brick and mortar store on Newbury Street. The store later closes.

2010: Karmaloop announces plans to launch a cable television network, KTV, on Comcast. Over time the company sinks $14 million into the venture, but Comcast never gives them the channel.

2011: Boylston Trading Co., a high-end menswear retail site owned by Karmaloop, launches. The site later shutters.

2011: Monark Box, a subscription service that mailed boxes of “exclusive” gear to members each month, is announced. The service later shuts down.

2012: Karmaloop announces MissKL.com, an attempt to grow the company’s female customer base. The site also closes.

2012: Karmaloop notches $127 million in annual sales.

2013: The Raine Group contacts over 120 groups seeking an investor for Karmaloop. None of the parties bought into Karmaloop.

2014: Consensus Advisory Services reaches out to more than 160 parties about investing in Karmaloop. No one invests.

2015: Karmaloop files for bankruptcy.

Sources: Karmaloop news releases, bankruptcy filings, and company officials


Taryn Luna can be reached at taryn.luna@globe.com. Follow her on Twitter @TarynLuna.