Where are they now: eToys.com

David Cotriss — Thu, 29 May 2008 15:19:21 -0700

Founding: EToys.com launched in 1997, co-founded by CEO Toby Lenk, COO Frank Han and Idealab founder Bill Gross. The company received over $15 million in funding from Sequoia Capital, Highland Capital Partners and Idealab, with an additional $100 million in funding from three private institutional investors led by Promethean Asset Management.

History: EToys seemed like the perfect idea for busy parents. It offered them a chance to order thousands of toys in every category from the comfort of their homes. The site’s Babycenter and Parentcenter sections, which featured articles and newsletters for new and expectant mothers, were popular and formed a loyal customer base. The editorial content also helped eToys distinguish itself from competitors and try to avoid the seasonality of the toy industry.

The site had fun features as well, including gift recommendations by age and information about popular characters, from Madeline to Barney. The company also won praise for its site design and had technically sophisticated warehouses and fulfillment operations.

EToys had a successful IPO on May 20, 1999. The offer price was $20, and it closed at $76 on the opening day. This helped generate praise for the online toy category.

Despite the positives, eToys suffered a black eye after it failed to deliver some orders in time for Christmas 1999, which ruined critical first impressions for new customers, and made many wary of using the site again. eToys’ lead was put in jeopardy after Toys "R" Us and Amazon.com formed a partnership in August 2000 – a major competitive blow to eToys going into the 2000 holiday shopping season.

What Happened: In an effort to avoid the shipping missteps of 1999, the company spent heavily to build two enormous warehouses to handle inventory and delivery. But Christmas sales for the 2000 season totaled $120 million, just half of the company’s projections, leaving the company out in the cold. Having run out of money and other funding options exhausted, eToys filed for bankruptcy in March 2001. That month, the company sold its Babycenter unit (including Parentcenter) to Johnson & Johnson for about $10 million.

In the following months, eToys sold $5.4 million worth of inventory to KB Toys, which also bought eToys’ trade names, logos, URL’s, and trademarks for $3.35 million.

Where Are They Now? The reasons behind eToys' failure are similar to those of other online retailers with plans for world domination: An immediate need for a large infrastructure and plenty of cash to support an untested business model.

“The bottom line is that eToys had the potential to be a great $500 million company but it was masquerading as a $5 billion company," Phil Polishook, vice president of marketing at eToys, tells The Standard. "I think that overall it was a well-run company, but in hindsight it built too big an infrastructure and spent too much money too quickly. Had the company grown more slowly, perhaps it could have survived the market downturn and grown into a nice $300 to $500 million company.”

Polishook is currently CEO of custom furniture maker Deskmakers. Frank Han is an entrepreneur in residence (EIR) at Redpoint Ventures & Greylock, and Toby Lenk is president of the ecommerce division at Gap Inc. Han and Lenk declined to comment when contacted by The Standard. EToys was reborn in October 2001 as a subsidiary of KB Toys. In 2004, eToys separated from KB Toys and is owned and operated by The Parent Company.

Were you an employee, customer, or client of this service? Then share your memories below! What did you like about the company? What didn't work? What other factors contributed to its success or failure?