Reference no: EM131721292

Problem: How Thread less Averted Collapse by Bringing on a Partner with Back-End Operational Expertise

Thread less is a community-centered T-shirt design site started in 2000 by Jack Nickell and Jacob Dehart with $1,000 of their own money. It's called "Threadless" because it started as a thread on the Dreamlist message board. Dreamlist was a place where designers could exchange information, and in November 2000, Nickell hosted a T-shirt design contest and let fellow designers pick the winner. The contest was such a hit that Nickell and Dehart decided to move it off the Dreamlist message board for the purpose of creating a website where future contests could be hosted.

Threadless was run as a hobby for most of 2001 through 2003, until Nickell and Dehart quit their jobs to start a Web consultancy firm and focus more intently on Threadless. The income they earned from Threadless quickly overshadowed what they were earning from the consultancy business, so in January 2004, they started focusing on Threadless full time. The way Threadless works is that each week about 1,000 designs are submitted online and are put up to a public vote. After seven days the Threadless staff reviews the top-scoring designs. Based on the average score and community feedback, about 10 designs are selected each week. The designs are then printed on clothing and other products and are sold through Threadless's online store and at their retail store in Chicago. Designers whose work is chosen receive $2,000 in cash and $500 in Threadless gift cards. Each time a design is reprinted, the designer received an additional $500. Threadless grew quickly. In 2005, it sold over one million T-shirts-all designed by the Threadless community. Nickell and Dehart were experiencing difficulties managing the growth. The firm's back-end operations were the main problem. Orders weren't going out on time, the Threadless website was down intermittently, and some months the company would max out the amount it could process through its merchant account and would have to stop taking orders. Worst of all, in 2005, T-shirts that were ordered in anticipation of Christmas weren't delivered until the following January.

Rather than collapsing under the weight of these problems, Nickell and Dehart took bold action. They sold a minority interest in Threadless to Insight Partners, a venture capital firm. They could have hired a consulting firm with operational expertise, but they wanted a partner that would have a long-term interest in Threadless's success. Insight Partners turned out to be an ideal choice. At that time, Insight had a program called Insight Onsight, where it would send personnel to evaluate its portfolio companies' operations. Insight sent personnel to evaluate Threadless's back-end operations and make recommendations. It moved Threadless's website to a new host, which was better equipped to help Threadless scale its website's traffic and sales. It also helped Threadless improve the functioning of its warehouse and fulfillment operations. Threadless's problems were smoothed out and it moved forward. It hasn't experienced significant technical or order fulfillment glitches since. In 2008, Threadless was featured on the cover of inc. as "The Most Innovative Small Company in America." It is credited with creating the online buiness model referred to as "crowdsourcing." Crowdsourcing is the process of soliciting ideas or services from a large group of people, called the crowd, rather than from traditional employees. A number of companies now utilize the crowdsourcing model. Many advertise themselves as the "Threadless" of their industry.

Questions for Critical Thinking

1. Do you think Thread less would exist today if Nickell and Dehart hadn't taken decisive action in 2005 and brought Insight Partners into the company as a strategic investor? Why or why not?

2. Why do you think Nickell and Dehart wanted a strategic investor to help Threadless work through its operational problems rather than hire a consulting firm? hiring a consulting firm wouldn't have required Thread less to surrender any equity.

3. Name at least two companies that are using crowdsourcing business models, similar to the model that Thread less pioneered in the early 2000s. How are the business models and the companies behind them performing?