While I am going to link this story to the Oregonian, I will also print the complete article of Brent Hunsberger's reporting about the collapse of NAU. Hunsberger did an excellent job of illuminating the internal perceptions and the external factors leading to it's closure. The Oregonian places stories behind a "you pay" firewall after 14 days and I want to keep this story available to those who are interested.
The apparel maker pushed the boundaries of a sustainable business, but it got too big, too fast_______________________________________________
As Portland's sustainable community comes to grips with the end of Nau, local business leaders and investors wonder what the collapse of its most visible green business means for the entire movement.
The answer: Not much, save one big lesson.
Green venture capitalists and local retail veterans view the apparel trendsetter's failure not as an indictment of sustainable business. Rather, most believe its May 3 demise shows how a new company trying to topple too many pillars is inherently at risk of collapse when the financial sands shift.
"The important story in Nau isn't that a sustainable company didn't work," said Michael Edwards, the former chief executive of Lucy Activewear Inc. who now heads the Bequia Group, a new Portland-based equity firm. "It's just really a function of the economics of the business model. The key lesson is to stay lean and mean until you get enough proven revenue."
It's a view Nau board chair and investor Stephen Gomez refuses to accept.
"I'm not going to get into second guessing," said Gomez , a former Nike vice president of global apparel. "I think the team did an excellent job . . . I just think we ran into a timing issue in the financial markets."
Nau succeeded in many ways, Gomez and others agree. The 3-year-old company lured top talent and $35 million in capital, a lot for any startup. It created eco-friendly fabrics from scratch, designed them into attractive and functional garments, cultivated a lot of buzz and set up model rules of conduct for other corporations to follow.
But it failed to persuade outside investors that its ambitious charge and high-cost structure could turn a profit in a few years. And just 14 months after it rolled out to consumers, it ran into an economic buzz saw that had private-equity investors ducking for cover.
What can other sustainable businesses learn from Nau? We attempt to tell:
Was Nau a financial failure?
Gomez declined to reveal exact revenues but indicated they were less than $6 million in 2007. Still, Gomez said, Nau generally operated according to its business plan.
One problem was that its Web site -- expected to generate close to 50 percent of revenue in Nau's first years -- failed to operate fluidly, Gomez said. Nau stopped driving consumers to it while working on an overhaul, which dampened revenues but did not cripple the company, Gomez said. Its newly designed Web site was scheduled to debut this week.
Mainly, though, Nau needed to open more stores before it could generate enough revenue to turn a profit or look appealing to a buyer. To do that, it needed more money.
We just ran into a black hole," Gomez said. "It was never easy for us to raise money, but we were always ready to do it. We always had a line of sight.
"Then, it was as if the telephone cords were cut."
Did Nau bite off too much?
Nau executives don't think so, but some venture capitalists and retail veterans say yes.
Nau aimed to shatter several business paradigms. It tried to carry itself and make products in a more conscientious and environmentally friendly way than its competitors. It gave 5 percent of sales to charity when most corporations donate less than 1 percent of profits. It encouraged customers to have their purchase shipped to them rather than carrying it home from the store. It muted its logo on its clothing. It eschewed selling product through existing retailers.
Most of that required a lot of money upfront. Ultimately, the high startup cost and rapid cash use scared investors even as Nau needed an infusion of money to continue.
"It was sort of a swing-for-the-fences play," said David Chen, founder of Equilibrium Capital Group, a new Portland investment firm focusing on sustainable companies. "Go big or go home, on multiple fronts."
Was Nau ahead of its time?
Maybe. Nau talked the sustainability talk and walked the walk before other apparel and footwear firms. "There aren't that many companies out there that would partner with you to break new ground," said Steven Lucier, president of Deer Creek Fabrics Inc. in Stamford, Conn., which supplied corn-based filament for Nau. At a minimum, though, Nau ran out of money because investors got frugal and viewed Nau's ambitions as too risky.
"There's just very little tolerance for risk," Gomez said of the private-equity market now. "They just felt like the stores that we had, we hadn't really proven our model, and that's really just another way of saying it's too risky. We were able to bring in the $35 million prior to that time with essentially no stores open. Things reverse themselves really quickly."
Was Nau top heavy?
Possibly. Among the 60 employees at its Pearl District headquarters, about 10 held the title of vice president or higher, Gomez said. Most hailed from large companies such as Nike.
By comparison, Portland sustainable apparel brand Sameunderneath Inc., with two stores and 100 wholesale accounts, employs seven at its headquarters. West Linn-based sustainable startup ENDoutdoor, whose trail-running and hiking shoes hit store shelves in August, employs five.
Some potential investors questioned whether Nau spent too much on higher-paid generals and not enough on foot soldiers. Gomez said executives operated frugally. "They ran really tight," he said. "Nobody was bringing their Nike goggles to work."
Is a sustainable business unsustainable?
Nau wasn't around long enough to tell. And certainly, organic food companies have profited as demand increases. And renewable energy ventures -- biofuel, solar power -- still attract investors' bets. "There are a lot of sustainable plays that are more capital efficient and less risky," said David Kirkpatrick , founder of SJF Ventures, a Durham, N.C.-based firm that invests in green companies.
What will Nau's legacy be?
More revered than reviled. Nau pushed existing suppliers to make clothing differently, designed new fabrics appealingly and found the clothing a market. Its already seasoned work force gained even more knowledge to take to other companies looking to practice sustainability. They also have startup experience.
"I wouldn't be in the least surprised if we see some Nau 2.0 concepts," said Sue Levin, Lucy's founder, now a venture consultant in Portland. "That DNA is going to do something really interesting here in the coming years."
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