Their gay social network, Fabulis, a mashup of Facebook, Yelp, Trip Advisor, and Foursquare, wasn't exactly failing but it was exhibiting the telltale signs of mediocrity. Like most entrepreneurs, they started out thinking they had a winner when they launched in April 2010, a clear niche they could serve. While there was Grindr and plenty of porn, there was no place online for gays to find relevant information about who to meet and where to go that wasn't focused on sex. In the beginning Fabulis was off to a strong start, signing up 50,000 members in its first three months, but then membership slowed, barely cracking 100,000 at the eight-month mark. At this rate, they'd be lucky to generate $10 million in revenue--this after raising $3 million in financial backing. "It was an eye-opening experience because even if you have this great idea and you build a really great product, people may not want it," Shellhammer says.
The two friends realized their mashup model had a fatal flaw, and this made it nearly impossible to crack users' "mindshare": Why would gays using Facebook, Yelp, Trip Advisor, and Foursquare switch to Fabulis when they were already well served by those social networks? After all, being straight isn't a social characteristic nor is being gay. For instance, they had introduced a check-in feature for users to visit bars and the like and rate them, an application Shellhammer dubbed "Gay Square." But they couldn't even convince their friends to try it. "We were like, ‘Why isn't anyone using it? It's so cool,'" Shellhammer says, "and they were like, 'Because we're checking in on Facebook.'"
Shellhammer and Goldberg had been friends for more than a decade, and took stock of their situation over a series of heart-to-heart talks over more than a few bottles of Bordeaux. Each, they agreed, brought different skills and acumen to the table. Goldberg was a serial entrepreneur (he blogs about his experiences here ); he had founded a social news service with a handful of developers and $800,000 in angel money, which sold less than a year later for $7.5 million. He was good at building websites, designing viral marketing campaigns, and engaging people online. Shellhammer, who had studied design at Parsons and was once one of Design Within Reach's top salespeople, was good at selling furniture, talking with designers--in his LinkedIn profile  he says he's "a classic connector with an eye for color and design"--and he has great taste. Now, a lot of people think they have taste, but Shellhammer, who owns roughly 140 pairs of shoes, really does. His homes have been featured in The New York Times , Dwell  and Time Out New York .
One of Fabulis's few bright spots was the "Gay Deal of the Day" through which they sold chocolates, lube, underwear, T-shirts, chairs, hamburgers--and anything else they could think of. It dawned on them they didn't have to build something and hope someone would use it in the hopes they could monetize it down the road. This was classic retail; no gray area. They make money by selling something, which was almost as old as human time itself, and in the process, they could tap a far bigger market. "Our whole pitch is we were for gay men," Shellhammer says, "so when we had overwhelming amounts of women come on and buy this Lucky's Hamburger deal, suddenly we're like, ‘Okay, so we sold 2,000 of these today, but half of them have women's names. Women like to shop, women like a deal."
On February 26th, 2011, they met with their investors and with $1.2 million in the bank explained their plans to pivot--or perhaps more accurately, reset their strategy--to a flash retail site. Goldberg, who initially invested $350,000 of his own money, announced he was putting in an additional $250,000, and said, "You guys can either stay in or take your money out." No one chose to leave. In retrospect, it was a wise decision.
They shut down Fabulis and Goldberg bought the fab.com domain, although he was reluctant to reveal how much he paid. I asked, "If I were to say $200,000, would I be off by a lot?" and he replied, "You would not be off by a lot. In fact, you'd be the first person I've ever said that to." At any rate, it was a bargain, since three-letter domains appraise for a couple of million dollars.
They posted a splash page that showed pictures of Shellhammer's apartment with a message: "Sign up now to be notified when we launch," and this unveiled their new aesthetic. Meanwhile Goldberg unleashed a viral marketing campaign  three months before fab.com relaunched. Not unlike PayPal, which offered a new user $10 for signing up and an additional $10 for each person he referred, fab.com, through a program called "Invite Your Friends and Earn Cash," set up inducements for each future user to become a de facto marketer. Convince 10 friends to join and you got a $30 credit; if you get 25 members, you receive an additional $30. You become a Prime Time member with 50 friends joining fab.com, and that meant free shipping for two months. Plus each user got a $25 credit for a friend's first $25 purchase within 30 days of joining. They also created an aspirational wall not unlike Pinterest, which let people share the kinds of products they wanted to buy. By June the new site counted 165,000 prelaunch users, with only 5,000 originating from their old business, Fabulis.
"People shared it before we even had a product to sell, because the idea was exciting and no one had done it yet," Shellhammer says.
Social media enabled Fab to amplify exponentially the old tried and true of someone finds an amazing chair, they bring it home and tell four friends about it when they come over. In the same way people see something on Fab, they go crazy about it and tell their friends. "That happens with design," Goldberg says. "No one's telling all their friends about the towels they saw on a certain site or a trash can they saw on a certain site. It's about stuff that people love; it's genuine."
While Goldberg handled the site, Shellhammer concentrated on the retail component, meeting with designers and loading up on inventory. Their new model was to offer 70% discounts on products that Shellhammer would handpick for their aesthetic beauty and function while designers would drop-ship so that fab.com wouldn't hold inventory. Right out of the box growth was torrential. Fab.com, which some have likened to "a combination of Gilt and Tumblr on a design bender," launched on June 9th and within 12 days was cash-flow positive, amassing $600,000 in sales and counting 215,000 subscribers. Eames chairs and other furniture, minimalist Swedish headphones, umbrellas and shoes all sold well, as did 200,000 antique typewriters. Shellhammer says Jimmy Jane vibrators are so far their biggest selling product.
In July, Shellhammer and Goldberg raised $8 million in a Series A, and by November had 1 million members; a month later Andreessen Horowitz led a Series B for $40 million, based on a valuation of $200 million. By February 2012 fab.com counted 2 million subscribers and today has more than 3 million , with 80% of its daily traffic based in the U.S. Furthermore, its mobile app, introduced in October, contributes 40% of fab.com's daily traffic, and half of its users to date have come via social channels. It's also been on a buying spree, acquiring NYC-based FashionStake to help it enter the apparel sector, and German Casacanda to expand its presence into Germany.
Ultimately, Shellhammer and Goldberg see Fab.com as a global brand and project revenues of $100 million by the end of this year. From a handful of employees a year ago they now employ 165 in New York, another 50 in Berlin, and 50 more in India. At the end of 2011 they counted 1.5 million members, which has almost tripled in five months, and they've launched Fab.com in 16 countries.
While their business is thriving, Shellhammer's former employer, Design Within Reach, is not , having delisted  its stock on Nasdaq in 2009 when it fell to $5 a share. Could Fab be a DWR killer? Shellhammer wouldn't comment, but Goldberg says, "We are actually making Design Within Reach affordable and our shop has endless capacity. We're not restrained by shelf space nor product category nor price points."
For anyone who doesn't know the backstory fab.com might seem an overnight success, but nothing could be further from the truth. It took hitting the reset button. It took some serious pivoting.
Adam L. Penenberg is a journalism professor at NYU and a contributing writer to Fast Company. Follow him on Twitter: @penenberg