This isn’t a moment Malmsten anticipated back in April 1998, when he was one of three young Swedes with a little bit of money and a lot of ambition on a scouting trip to Manhattan. With his business partners, Kajsa Leander and Patrik Hedelin, Malmsten had an audacious idea: to build an ultrahip, technically awesome, global Internet retailer, with a Web site that would offer, in multiple languages and currencies, up-to-the-instant streetwear for the affluent young, wherever they lived. Unable to talk their way in to see actual suppliers, they planned their future inventory by prowling sporting-goods shops and checking out the latest downtown looks. Leander, a former model, had a particularly discerning eye. Then they sat at the Boat House in Central Park, sipping daiquiris and pounding out a business plan on a laptop.
In the two years spanning those two drinks, boo.com came to embody the wild and crazy dot-com experience even more completely than Miss Boo, the company’s online avatar, was meant to embody style. When Web sites selling to consumers were sexy, boo.com’s attractive founders and Internet-meets-fashion pitch made the company irresistible to media and investors alike. And when online retailers began to wobble, eventually leading the industry into this spring’s brutal shakeout, nobody fell harder than boo. Its liquidation May 18, after plowing through $135 million (from a stable of investors that included luxury tycoon Bernard Arnault, the Benetton family and the former prime minister of Lebanon) sent shock waves around the world. For market-watchers “Post-boo” is a new era–this is Internet time, remember–defined by a back-to-basics approach, where profits turn out to matter after all.
Boo’s blazing arc through cyberspace has been widely noted. But until they opened up to NEWSWEEK, Malmsten and company had yet to be thoroughly debriefed on the experience. What was it like? In a nutshell, 24 months of selling, spinning and scrambling–usually on very little sleep, but with occasional relief from the vodka and grapefruits that became the official company drink. There was Malmsten, whose halting speech and oft-tilted head belie a gift for getting people to buy into his vision–including a hoped-for stock-market listing last fall and a billion-dollar valuation. “When everybody was flipping out, Ernst would come and inspire us to believe again,” says a manager. There was the beautiful, cerebral Leander, who handled the marketing (including Miss Boo) with an obsessive attention to detail. There was Hedelin, the finance guy who by most accounts shouldn’t have been. There were wild incongruities, such as the marketing plan that was a full six months out of sync with the company’s operational progress. And there were countless details that sprang up like the Devil himself. How do you design a stock-option plan acceptable to regulators in six different countries?
At the center of it all were Leander and Malmsten. The two first met in kindergarten, then reunited outside a Paris nightclub in 1992. Smitten, Malmsten soon joined Leander in New York, where she was studying art history at NYU and modeling to pay for it. They spent a year preparing a Nordic-poetry festival there, showing enough marketing flair to get Esquire magazine to do a feature on it. Moving back to Sweden, their romance ended but their partnership bloomed: they founded an online bookstore called bokus.com that became Scandinavia’s biggest. They met Hedelin when he helped them sell the company to a big retailer, making them both millionaires.
As Internet experience goes, it wasn’t bad. So three weeks after that initial 1998 visit, the trio returned to the United States to try to raise money from some heavyweight investment banks. Alas, the major tech players wouldn’t bite. Hedelin was cold-calling banks from snazzy hotels like Manhattan’s SoHo Grand and talked his way into nine, but only J.P. Morgan took an interest. Morgan, a big name in banking but still a small one on the Net, took a stake in the new company in exchange for its help in attracting investors.
The Morgan name proved a great calling card. And the bankers worked hard, lining up potential investors and teaching the young entrepreneurs to make their pitch in four minutes. “They told us to stop interrupting each other,” says Malmsten, interrupting Leander’s account of the private jets and Concorde flight Morgan arranged to get them to all those meetings. Malmsten recalls landing in San Francisco at sunset to find two black limos waiting. “It was my first picture of capitalism on this big scale,” he says. But he was learning fast. Already, Leander had broken him of his habit of carrying things around in plastic bags; she stopped a London taxi in front of a Prada shop for three minutes and made him buy a briefcase.
By December 1998, some big chunks of European and Middle Eastern money were nearly in the bag. Boo’s timing was exquisite. Having watched Internet fortunes spring up in the States, Old World investors were eager to ride the wave–and these clever young Swedes were thinking really big. “We wanted boo to be something extraordinary, fantastic and very, very different,” recalls Leander over a simple risotto lunch in London. Boo–a name chosen because it’s short, catchy and otherwise meaningless in major languages–planned to launch worldwide, creating a global brand from scratch. The company would dare to ditch the prevailing e-commerce discount model by charging premium prices for DKNY Active sweats, New Balance running shoes and Helly Hansen jackets. And it set ambitious technological goals for the Web site, from rotating 3-D views of every item, to Miss Boo’s ability to change expressions and give fashion advice, to a backend (ordering, billing, payment and distribution) that required no humans and not a scrap of paper–until the brightly colored box was delivered to your door with a thank-you note written in original Boo Gothic typeface. “It was sexy,” says Leander, “because no one had done it before.”
Sexy it was; but who could build the systems to actually make it happen? In late 1998, after talking with IBM and Hewlett Packard, Malmsten chose Sweden’s Ericsson. “Ericsson’s team was new to the business, so we thought they would try harder,” says an adviser. Perhaps they did, but progress was slow. By Christmas, Malmsten decided–with only three tech staff on board–to move the complicated systems integration in-house.
Colleagues say that Malmsten and Leander often argued, usually three-minute exchanges in rapidfire Swedish. Now they had more and more disagreements to sort out. For even as the tech development fell behind, Leander was putting her $42 million marketing budget to work, based on the planned launch date of May 1999. In February she bought ad space on billboards in Scandinavia and Germany and in the June issues of lifestyle and fashion magazines. She and Malmsten lunched with New York fashion editors and were written up in Vogue, with the article timed to appear in May. On advice from Hill & Knowlton, the publicity began to focus on the Leander-Malmsten story. Hedelin joined in the Vogue shoot–much to the annoyance of the photo editor, says an executive–but after that he was out of the public picture.
Meanhwhile, the tech side struggled to keep up. “I don’t know if people told Ernst and he ignored them, or if they just didn’t tell him,” says an employee. There was no real software-development plan. “It was more like a feature wish list,” says James Cronen, deputy chief technology officer. “Clearly madness.” Even after the team missed the May launch, no new target was set; rather, launch was always “two weeks away.” Finally in July the system was ready for testing. It flunked badly, and an expensive team of consultants was brought in to sort things out.
The fix-it folks were just one reason spending was getting out of hand. The money flowed in–investors had put up $61.5 million by early August–and then right back out. Having geared up for the May launch, boo was now paying for office space and staff in New York, Paris and three more of the world’s most-expensive cities. Back at headquarters in London there was neither a procedure for filing purchase orders nor a real chief financial officer. In June, after firing its first CFO, management brought in a partner from KPMG as interim finance chief. That left Hedelin (who considered himself a dealmaker, not a bean counter) free to raise still more money–and to work on edging out J.P. Morgan in favor of one of the big-name tech banks he wanted to use for an IPO. Morgan bankers had come to think he was in over his head; inadvertantly, Hedelin let them know that the displeasure was mutual. Attending a dinner at the London offices of Goldman Sachs, Hedelin left his mobile phone at the security desk. The guard helpfully hit the redial to try to find out who had left it behind–and reached a J.P. Morgan banker, who was none too pleased to find a client consorting with his rival.
Goldman took a small stake in the company in August. Why not? The Internet boom remained in full swing, and a rich IPO still seemed within reach. Leander kept the media buzz going. TV spots were being directed by Roman Coppola, director of the award-winning Fatboy Slim music video and son of Francis Ford Coppola. Danish designer Fritz Hansen contributed the logo. A famous hairdresser was flown in from New York to do Miss Boo’s hair; a famous copywriter wrote her lines. Yes, it was all pretty expensive. But Leander says such moves brought tens of millions of dollars worth of publicity. “The glamour was very calculated,” she says.
Those TV ads were booked to run in Britain in November. The launch couldn’t be delayed any longer. Seven weeks before Christmas, Miss Boo went online–and fell flat on her face. Fewer than 25 percent of attempts to access the site were successful. Boo’s image was fraying badly. The TV commercials turned out to be pretty weird. The venture-capital world, which had never much liked boo because its founders raised so much money while retaining such a big chunk of equity, had nothing good to say. And the media stopped celebrating the Swedes and started bashing them. “They raise you up, then take you down, then raise you up again,” shrugs Leander.
It was shocking: for the first time in months, investors were leery of giving boo more money. Federated Department Stores had signed a letter of intent to take a stake in boo but backed out. Before a fifth round of financing in December, boo’s investors set some conditions: cap the monthly cash-burn rate at $7 million; the founders had to kick in another $1 million apiece; and Hedelin had to go. “It may have been a consensus view, but it was not very well handled,” says Malmsten. Hedelin remained a shareholder and nonexecutive chairman.
Painful as they were, the measures–which soon included layoffs for 130 of boo’s 420 employees–were stopgaps. The plan was to do one more round of financing and then go straight to an IPO. But now boo’s timing was exquisitely bad. Having had a disappointing Christmas, e-tailers in general were rapidly falling from investors’ favor–a trend that would culminate in the general Nasdaq market meltdown in April, and the troubled IPOs of a couple of other high-profile European Internet companies. Boo finally hired the big-name CFO it needed in February, when Dean Hawkins came aboard from Adidas, but there wasn’t much he could do to soothe investors. Anyway, he quit after just two months, partly because he favored selling boo to another company, while the founders battled on for a more lucrative IPO. Then, on April 16, J.P. Morgan resigned as boo’s financial adviser, concerned that the various schemes to bring in a buyer would erase the equity of the original investors, exposing the bank to lawsuits from its clients.
Ironically, the operations side–ever out of sync with everything else–was humming along pretty well by this point. Sales jumped from $1.1 million in February-April to half a million in the first half of May. But boo was still spending nearly $3 million a month.
Desperation set in. Bernard Arnault’s fund, Europe@web, and Omnia, a fund managing investments for the Lebanese Hariri family, and the biggest single investor, offered $5 million on the condition that others would ante up a further $25 million. In a last-ditch effort, Malmsten, Leander and two others sat hunched around the conference table in London, chugging Diet Cokes and calling everyone they knew. All they could muster was $15 million.
Resigned, Malmsten called a board meeting for 8 p.m. on May 17 at boo’s Regent Street headquarters. The board voted to liquidate the company and adjourned by 8:10. Top managers got out the press releases, then called all the employees so they wouldn’t hear it from the news. That night, alone in his flat, Malmsten watched all the networks trumpet his failure. “I thought I’d never find another job,” he recalls. He called his parents, who suggested he think of it as an expensive Harvard M.B.A. (He lost $1.5 million in the company.) Leander also faced the news reports alone; her fiance and their 3-year-old daughter were back in Sweden. After sleeping two hours she arrived at the office at 6 a.m. to avoid the journalists.
So how does it feel to burn through $135 million in 15 months? “It’s a mix of bitterness, guilt, regret and sadness,” says Malmsten, in his elegantly minimalist apartment in London’s Notting Hill. “I’m not bitter,” interjects Leander. “But I feel guilt for the employees; we let them down.” Still, just about everyone has already landed a new job at a start-up or a consultancy, complete with hefty sign-up bonus. Vizzavi, the Internet portal just launched by Vivendi and Vodafone AirTouch, nabbed 10, including the chief legal counsel. Malmsten and Leander have plenty of offers too, but haven’t decided what they’ll do next–or even if they’ll work together. But having shared such a wrenching experience, most of the boo crew seems interested in staying in touch with one another. They’re already swapping new mobile numbers over a password-protected site called–what else?–vodkagrapefruit.com
