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What Nau? What Nau?

What Nau?

by Luke O'Brien
October 31, 2008

The innovative clothing company Nau was supposed to transform the apparel industry. Instead, it tanked. So what went wrong, and what happens next?

Unfuck the world. Mark Galbraith remembers when he first heard the phrase. It was June, 2004. Galbraith was sitting in Typhoon, a pan-Asian restaurant at the Santa Monica airport in California. He'd driven in from Ventura, where he oversaw design, merchandising, and pricing for Patagonia. He'd been slugging back sake for a couple hours when his dinner companion, Eric Reynolds, slid a document across the table to him."I need you to sign this," Reynolds said, and excused himself to the bathroom.In front of Galbraith was a nondisclosure agreement. Given the conversation, this wasn't unusual. Reynolds had spent the afternoon getting to know Galbraith better. Now, Reynolds intended to lay out his vision for a new clothing company with a radical business model. It had potential-enough potential, Galbraith thought later, that the company, eventually dubbed Nau (Maori for "Welcome. Come in."), might redefine the outdoor industry. Reynolds' plan was inspiring: Nau would be the first major apparel company built for sustainability from scratch. The clothes would be sourced down to the fiber, made only from the most environmentally friendly material in the most socially responsible manner. And they would be fashionable.Reynolds wanted to sell the clothes directly to customers online and in stores that merged brick-and-mortar retail with an internet experience. Called "webfronts," the stores would educate customers about the products through touch-screen computers. If shoppers opted for a "ship-to-you" feature, their purchases would show up a few days later in the mail, and they'd receive a 10 percent discount for their trouble. The webfront idea would cut out middlemen and keep inventory low (along with carbon emissions). Perhaps most striking, though, was Reynolds' goal to give away 5 percent of Nau's sales to nonprofits. It was a staggering amount. Patagonia, the industry leader in charitable companies, gives away 1 percent.Risky stuff, for sure. But Galbraith was intrigued. He reached for the nondisclosure agreement. That's when he noticed the mysterious acronym printed on top: UTW. As Galbraith puzzled over the letters, Reynolds returned. He hadn't gone to the bathroom. He'd rushed out to his car and had come back wearing something other than the Patagonia polo he had on minutes earlier."He had changed sort of Superman-style into a T-shirt," Galbraith recalls. "It was a Michael Franti T-shirt that had in big letters across it: Unfuck the World."Galbraith glanced at the acronym, looked back up at Reynolds, and provided the only suitable response: "Fuck yeah!"Thus began a grand experiment. Nau would soon go from sake-soaked dream to bona fide startup with more than 60 employees, $24 million in capital, and outsized buzz for its business practices. Apparel is an unkind industry-from 2004 to 2005, nearly twice as many apparel, piece goods, and notions wholesalers died as were born, according to the U.S. Census Bureau-but Nau intended to defy the odds. It boasted an expert staff and stylish products. More important, its ideals differentiated the brand dramatically.
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Poor planning and hard luck torpedoed Nau. But to the faithful, the company's demise was more than a financial undoing. It was the failure of a movement.
Although UTW remained Nau's underground catchphrase, the company slogan later morphed into something more presentable: "Do well by doing good." In a cutthroat capitalist landscape befouled by the Enron scandal, skyrocketing CEO pay, and hollow attempts by multinationals to look green, Nau intended to set things right, to blaze a new trail for apparel and, possibly, corporate America.What happened instead was quite different.Barely a year after Nau's clothing landed on store shelves in March, 2007, the company went belly-up, done in by overreaching ambition and a slumping economy. Reynolds was canned by his handpicked management team. And a young ecosystem of socially responsible startups was left to wonder what message Nau's implosion might send. Instead of fixing everything, Nau had fallen apart.Inspiration for Nau arrived in Yosemite Park's Tuolumne Meadows. Tuolumne is holy ground for conservationists: it's where John Muir worked as a shepherd in 1869 and was later inspired to create the Sierra Club. And it is where Reynolds, an expert climber, spent summers as a boy. In July, 2003, mired in a depression, he returned to the meadows for a reunion with his brothers and friends. The hours around a campfire, talking late into the night about social and environmental issues, rekindled old passions in the 56-year-old."It blew on some long-dormant embers," Reynolds says. He recalled what his activist parents had taught him growing up: One person can change the world. Reynolds had co-founded another outdoor clothing company, Marmot, in 1974. Apparel was a natural place for him to sow change. Within weeks of that camping trip, the idea for Nau coalesced.Over the next year, Reynolds honed his concept on hundreds of pages of spreadsheets. He also happened across the writings of Robert Hinkley, a reform-minded corporate attorney who advocated inserting a "code of corporate citizenship" into every company's charter. The code would legally require businesses to make money, but not at the expense of the environment and human rights. This triple-bottom-line focus aligned perfectly with Reynolds' goals.

After developing an expanded version of Hinkley's code that also obligated Nau to donate 5 percent of its sales, pay fair wages, provide equal benefits to domestic partners, limit executive compensation, and promote conflict resolution, Reynolds set off to recruit his team. He had a list of impressive candidates, many of them high-level Patagonia and Nike employees. In short order, he persuaded Galbraith (who came on as VP of design) and several others to sign up. Many left good jobs and moved to Portland. The team white-boarded operations at a condo owned by Chris Van Dyke, the new CEO. With their well-placed connections, the group raised $2 million from angel investors such as Stephen Gomez, a former Nike executive, and Peter Metcalf, the CEO of Black Diamond, a manufacturer of climbing and skiing gear. Steve Luczo, the current chairman and former CEO of Seagate, invested a large amount shortly afterward.But once Van Dyke began to test the venture-capital waters, the money spigot rusted over. Van Dyke talked to almost every major venture-capital company in California. He didn't land one. The 5 percent giving was an early obstacle; Nau's original business plan was also wildly ambitious, calling for $250 million in revenue by 2010, and more than 200 webfronts by 2012. "I always advise companies that are trying to do good to be willing to grow slow," says Tim Sanders, a Fortune 500 consultant and author of Saving the World at Work. "Apparel is a dog with fleas, as they say in the business: It's pretty labor intensive."
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The irony of Nau's demise is that a company so committed to sustainability was ultimately unsustainable. But not because of its principles.
Ian Yolles, Nau's head of marketing, remembers a particularly deflating meeting with Maveron, the venture-capital company founded by Starbucks CEO Howard Schultz. "We walk in and start telling our story, and it seemed to be going incredibly well," Yolles recounts. "We get to the slide that had the store openings. As soon as that went up, it was like the wind was literally sucked out of the room and basically the meeting was over. We had spent 45 minutes building credibility, and that vanished after they saw that slide."It would become a familiar pattern over the coming months: Potential investors loved Nau's passion, but had qualms about the scale of the business. As the team encountered resistance, it reined in plans. By January, 2006, Nau had reduced the number of stores it hoped to launch in its first year from 60 to four. There were also internal problems brewing. Reynolds took issue with several of the management team's moves and was adamant that Nau set up a separate foundation to manage its 5 percent giving program, to ensure it would survive if Nau ever changed hands. "The shareholders should make that decision," Reynolds said. At the time, Reynolds was the majority shareholder.The tension climaxed when Nau locked up $5 million from Prentice Capital Management, a New York hedge fund. After winning a battle with Prentice's lawyer to preserve the Hinkleyesque language in the bylaws, the team found itself facing an even bigger challenge. Reynolds, some say, was intent on creating a foundation at any cost."Eric came to me and said, ‘If we don't get a foundation, I'm going to squirrel the deal with Prentice,'" says Jil Zilligen, Nau's former chief sustainability officer and the head of the giving program.Reynolds disputes this. "I thought it might be better to get money from elsewhere," he says. "But I never wanted to squirrel the deal."Although Reynolds eventually signed off on the Prentice deal, his days at Nau were numbered. Former employees say he was behaving erratically and interfering with business operations. He clashed often with Van Dyke. But the situation was complex. Reynolds had created the company."Eric came up with the core ideas," Yolles says. "Not Chris. Not Jil. Not me."Yolles and other members of the core team went to extraordinary lengths to keep Reynolds involved. It was to no avail. Gradually, he was phased out. He wasn't given a desk when Nau switched offices. He was forbidden from talking to Nau executives about business, cutting him off from many of his friends. The pressure  to resign from the board became overwhelming.In January, 2005, Reynolds stepped down. His e-mail was later blocked at the server.Reynolds's departure punched a hole in the happy narrative Nau had been knitting. Realizing a vision, after all, can get weird once you dispatch the visionary.

Three-layer breathable waterproof recycled polyester. Translation: a design breakthrough. One of several, in fact, for Nau, which marched on without Reynolds and, by late 2006, had its supply chain in place and clothes in production. Nau had partnered with high-tech textile mills such as Polartec, in Massachusetts, and Teijin, in Japan, both of which produce synthetic recycled fabrics from goods such as plastic bottles and polyester yarn scrap. Instead of picking pre-existing fabrics out of a mill catalog, Nau created its own.With a focus on sustainability, 27 of the 30 fabrics in Nau's first line were original. Although Nau placed small orders, the mills welcomed the chance to be innovative, knowing that greener threads held longer-term potential."You've got to take a chance once in a while on the little guys," says Nate Simmons, the spokesman for Polartec. "The consumer market is more ready than ever to embrace eco-friendly products."Nau didn't limit itself to recycled synthetics. Clothes were also made from polylactic acid, a malleable substance created from corn sugar that can be turned into wicking fabrics and industrially composted after disposal. Since Nau assumed the stock it used was genetically modified, the company bought offsets of GMO-free corn. Nau also ensured its cotton was organic, tracking bales from field to gin to spinner and onward. Most of the wool came from Zque, a company in New Zealand with strict guidelines for animal husbandry and water use. Cut and sew facilities were in China, Hong Kong, Thailand, Canada, Turkey, and Portugal. Nau used Verité, a third-party auditor, to keep tabs on working conditions.The discerning approach forced Galbraith to work within narrow parameters, inventing stylish and sustainable clothes that could be recycled but would also hold up for a decade. He likened the process to "Haiku poetry with half the keys off the typewriter." He worked in muted greens, browns, and grays. And he laced the designs with a subtle hipness-logoless, with off-center buttons, exposed stitching, or iPod pockets. The point was to stand out while blending performance, beauty, and sustainability. Those attributes synched with Nau's three targeted customer types: the outdoor athlete, the fashion-conscious creative, and the modern activist. If a product crossed boundaries among the groups, Galbraith had done his job.In February, 2007, Nau started selling clothes through its recently launched (and admittedly clunky) website. With prices ranging from $32 for boxers to $248 for waterproof jackets, Nau's garments cost about the same as those from high-end outdoor brands like North Face, Arc'Teryx, and Patagonia. They received favorable write-ups in Men's Vogue, I.D., Time, and other slick magazines. In March and April of 2007, webfronts opened in Chicago and Seattle, along with Boulder, Colorado, and Portland, Oregon. The clothes were an instant hit with consumers, who embraced everything Nau stood for - including the ship-to-you option: nearly half of Nau's webfront customers opted in.But the ultimate victory was the 5 percent giving campaign, called Partners for Change. Nau let customers decide where the money would go, offering a menu of international, national, and local nonprofits: Mercy Corps, Kiva, the Oregon Natural Desert Association. "The idea was to ask people to pause even for a second to think about civic engagement," Yolles says.Almost $250,000 was given away. The program earned Nau ecumenical praise. This, of course, was Reynolds' intent. Instead of spending 10 percent of the budget on marketing, why not donate 5 percent of profits and reap the good publicity? Savvy customers sniff out greenwashing, but Nau clearly walked the walk.Outwardly, the company appeared on track. Nau was selling clothes at a respectable clip that would bring in around $5 million in sales that year. Behind the scenes, however, Nau was burning through cash.  Building stores was expensive. And the company eventually had around 60 people on the payroll."It took the traditional startup mechanism and turned it on its ear," says Hal Arneson, Nau's creative director. "It basically required a massive amount of capital infusion to realize our goal."A major cost was Nau's pricey website, a quagmire of flash code that, according to Reynolds, made online purchases a challenge for even the most patient of shoppers. More troubling was that Nau failed to address the problem quickly.This inexperience revealed itself in other ways. In constant need of capital, a haggard Van Dyke continued to haul himself in front of money managers. (He closed four financing rounds in total.) But he'd never raised capital before. No one at Nau had. For all the blue-chip talent assembled, this was a shortcoming. Nevertheless, in the spring of 2007, Van Dyke hooked Tudor Investment Corporation for $10 million. Tudor indicated they'd pick up the rest of Nau's $25 million financing if the company hit its new benchmarks by the end of the year. (Tudor also negotiated a first right of refusal.) Nau finally had some cushion. It wouldn't last long.
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"Nau set the bar so much higher than anybody else. How much effect did Nau have in the larger context in terms of American business? I unfortunately think it had fairly little because of how it cratered." -Eric Reynolds, founder of Nau
The end came quickly. Tudor had invested heavily in sub-prime mortgage securities and suffered once the economy started to slump. When Van Dyke showed up for a routine meeting in November, 2007, he got the devastating news: Tudor had decided not to invest in the next $25 million round, the amount Nau needed to become self-funding."We were going into the Christmas holiday and we'd lost our financing," Van Dyke says. "This was when financial institutions [were] starting to melt down. The psychology changed in the marketplace really dramatically, from people being excited about new ideas to being fearful of them."Nau went into scramble mode. Van Dyke made more than 50 presentations in the next few months, but he couldn't find any more money. On April 24, 2008, a month before Nau hoped to launch a redesigned website, the board decided to shut down operations. The stores were shuttered and every employee was off the payroll three days later."We had just opened our fifth store in L.A. We had four stores under construction," Yolles says. (To boost revenue and get into the black, Nau needed to open 39 stores by the end of 2010.) "There was a big article in Fortune. There was all this momentum. How could this happen? It was like being at your own funeral."Customers took the collapse hard. Poor planning and hard luck had torpedoed Nau. But to the faithful, the company's demise was more than a financial undoing. It was the failure of a movement. Hundreds of letters and blog comments poured into Nau's offices. "This sets a very bad precedent for the whole sustainable apparel movement," one observer wrote. Others grieved openly: "I never thought the loss of a brand could break my heart."Nau had gambled naively without a backup plan. But the company had come close to turning a corner. The clothes, the webfronts, the giving program, the bylaws-they all worked. The fundraising and the timing hadn't. The irony, of course, is that a company so committed to sustainability was ultimately unsustainable. But not because of its principles. Rather, the mundane problems that plague most startups-lack of money and poor execution-had undermined Nau. Still, the brand had an impact in its short life span, accelerating the greening of the apparel industry and creating a new genre of outdoor clothing."Nau set the bar so much higher than anybody else," Reynolds says. "The ripples from that stone in the pond hit the shores. How much effect did Nau have in the larger context in terms of American business? I unfortunately think it had fairly little because of how it cratered. … If they had raised the money, I believe the company would have become a going concern."
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In its new life, Nau no longer has to worry about raising capital to birth a fully formed brand. It will grow organically, perhaps the way it should have from the start.
So did others. A handful of Nau staffers weren't ready to give up. Mere days after Nau closed shop and began the process of winding down operations, Yolles started working the phones looking for a buyer for Nau's remaining assets. One of his first calls was to Gordon Seabury, the CEO of Horny Toad Activewear, a Santa Barbara clothing company involved in social entrepreneurship. Seabury had watched the evolution of Nau with interest. He was a fan of both the clothes and the concept. Within weeks, he flew to Portland to meet with Yolles and the remaining team. It was something of a role reversal: Instead of Nau bowing to its potential buyer, Seabury had to prove his dedication to Nau's ideals."Just because somebody wanted to purchase the assets didn't mean that our core essence would be maintained," Yolles explains. "We needed to be comfortable and confident with the purchaser."Seabury passed the test. In June, he bought what was left of the company for an undisclosed sum. This October, Nau will relaunch using the same farms and mills, with Verité continuing to monitor labor conditions. Already, the factories are cutting and sewing again. In its new life, Nau no longer has to worry about raising capital to birth a fully formed brand. Under Horny Toad, the company will grow organically, perhaps the way it should have from the start."If we have to leave some growth on the table in return for being a bit more cautious and successful in the long run, that's okay," Seabury says. "It's all about lifetime impact, and you can't have a lifetime impact unless you're sustainable on the business side."When word of a revived Nau first surfaced, Nau fans were overjoyed. "Words can't express how amazing this is," wrote one commenter on the Nau blog. "This is such great news-I almost feel like crying," another posted. Support from brand devotees hasn't waned, but those same customers will take a hard look at the new Nau, which is a crash diet version of its former self. Only a dozen of the former employees remain. There are 100 fewer styles in the upcoming fall line. And the old stores are closed for good. Nau is instead shifting to a wholesale model, with plans to partner with retailers such as Paragon Sports in New York, Uncle Dan's in Chicago, and Ellie's Eco Home Store in Boulder. Most noticeably, the 5 percent giving program will drop to 2 percent, with fewer nonprofit organizations for customers to choose from.The main issue-the one Nau's devout customers will scrutinize-is how committed the company remains to its founding values. "How much does pragmatism and convenience and affordability chip away at the bigger idea that really gave Nau meaning?" Van Dyke wonders.So far, the answer seems to be not at all. Seabury says he won't change any practices at Nau, but he will approach the company's old bylaws with prudence. Horny Toad shares a similar philosophy as Nau, but Seabury knows how important the bylaws are in maintaining customer confidence. He may ask his board to adopt the same language. "We definitely take it seriously," he says. "The only way I can sleep at night is if we do the right thing."In the near future, businesses doing the right thing may be the rule, not the exception. And in the apparel industry, they may have Nau to thank. Bold ventures often result in big gains. But they are risky. In the case of Nau, the company left ample wreckage in its wake. Shareholders lost everything. Creditors must still be paid. Almost 50 employees who uprooted their lives in pursuit of a dream were laid off. Van Dyke is no longer part of the company. He disappeared the day Nau folded, calling it "the worst work experience I've ever been through." He has distanced himself from his former colleagues.Then there is the matter of Reynolds. His wounds have yet to heal. He'd like to hear from his friends, but he suspects they feel too guilty about what happened to him. He's involved with Barefoot Artists, a group that does relief work in Rwanda. He's put his house in Colorado on the market. He plans to move to Africa early next year.And what of Galbraith, Yolles, Arneson, and the remaining members of Nau? Well, they still hope to change the world. But slowly. Instead of unfucking it, they get to clothe it, one three-layer breathable waterproof recycled polyester garment at a time.
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