Loot Crate: The Mystery Box Startup That Failed Because It Grew Too Fast
Loot Crate is the most popular subscription box service in the world and the idea behind it was very simple: Comic-Con in a box!
The founders of Loot Crate, Chris Davis and Matthew Arevalo, didn't dive into an existing market - instead, they created a whole new market of subscription-based mystery box services.
The idea was for the most passionate comic book, movie, and video game fans to subscribe to the service and receive one box a month delivered to the door. The features of the boxes, or 'the loot', ranged from t-shirts and action figures, to snacks and badges - basically, geek heaven!
This is the story of how one man, supported by a fellow visionary, turned his geekdom into a $160 million dollar business, only to become a victim of his own success.
Chris and Matthew's Ventures Before Loot Crate
Chris Davis is the son of tech-giant Qualcomm's CFO George Davis, so the idea of starting new businesses was innate in him. A Claremont McKenna College alum, Chris had participated in several hackathons following his graduation, which included developing a dating app called Box Office Buddies.
On the other hand, Matthew was interested in technology from a very young age, which led him to develop a passionate love of gaming and consoles. He took up a job as an editor for his high school newspaper and became obsessed with creating new content. However, after leaving school, Matthew started working for big companies like Microsoft and Apple, but soon learned that working for a corporation bored him to death.
He quit and decided to follow his own path in the corporate world.
He started a consulting agency focused on social media outreach, and worked with big companies during the late 2000s and early 2010s, helping them promote their brands through social media.
Matt and Chris met at a business seminar in Los Angeles in August 2012. Participants at the weekend event would pitch their ideas with new, out-of-the-box business models, and Chris' idea was a monthly subscription service for geeks and gamers. The concept was straightforward - put Comic-Con in a box.
When Matthew heard the idea, he was immediately in - and their journey began!
48 Hours For The First Subscriptions
Chris had the business know-how, and Matthew knew how to maintain an online presence. They created Loot Crate just a few days after a weekend business retreat, acquiring 50 subscribers just 48 hours after launching. No, this wasn't just a simple business exercise - Loot Crate was on!
They came up with the name and logo in the first 48 hours as well, and the first Loot Crate box was shipped in August 2012.
The first month, they had more than 200 subscribers, so the duo packed 220 boxes in Matthew's back garden in just 8 hours, and shipped them all by standard UPS mail. The boxes contained gamer toys, food, and other gaming-related products with the purpose of grabbing the attention of gamers and geeks.
Chris and Matthew called the subscribers 'Looters', and each box contained a unique 'Looter number' - something they knew geeks would love. What subscribers also loved was the excitement of opening a box without knowing what was inside it.
The mystery box market was non-existent in 2012, so Chris and Matthew had to work out all the features and pricing of the boxes themselves. The initial price of the Loot Crates was $13.37, an ironic gamer price denoting 'leet speak', which also gathered attention. The first box contained a greeting card, a Marvel action figure toy, a few energy snacks, a superhero-inspired cologne, and a key chain.
A Lucrative Marketing Strategy That Made Millions
Within weeks from launching, Loot Crate became extremely popular among geeks and gamers. The hype was real: everybody in the geek community talked about it, magazines were writing articles about it, and YouTubers unboxing Loot Crates got millions of views in a matter of hours.
The September 2012 Loot Crate Box was a massive hit, so before the October 2012 Box was released, they thought it would be a cool idea to put a t-shirt inside too. Afterward, Chris and Matthew changed the design for the February 2013 box, attracting even more subscribers and attention to their product.
Loot Crate's rapid growth was a result of Matthew's social media knowledge. He knew the power of social networks and used them to attract new subscribers and make the brand more popular.
By 2013, Loot Crate was sending out free boxes to famous YouTubers, which was a form of advertising that was relatively new at the time. The Loot Crate unboxing videos got so popular, some YouTubers paid for their own Loot Crate boxes just so they could film an unboxing video!
Although the subscribers base was growing, the profit wasn't. The founders decided to raise the price of the box from $13.37 to $29 in May 2014, significantly raising the profit margin, and surprising some of their fans.
Not that they stopped buying the boxes!
By 2014, the subscriber base rose to 200,000, and things were running smoothly. As Chris' appetites grew, Loot Crate implemented a number of new features, including the Share feature in February 2015 and the 'Lvl Up' feature in August 2015.
Chris had the idea to expand Loot Crate and offer Looters the option to choose specified boxes beside the standard Loot Crate box.
The first options were Loot Crate Anime, Loot Crate Star Wars, Loot Crate Call of Duty, and Loot Pets. Looters loved the new additions, and their response signaled the start of the golden age for Loot Crate!
At the beginning of 2016, Loot Crate made it to the cover page of Inc. Magazine as the fastest-growing private company in the US, with more than 650,000 people subscribed to the service. The business saw a growth of over 40% in a single year, raking in $165 million of revenue by the end of 2016.
With all the products and the popularity that came with them, from that amazing weekend in 2012 to 2016, Loot Crate grew by almost 66,000%. However, the numbers weren't telling the true story. There were issues behind the curtain, which would pave the way for the downfall of this innovative company. Unfortunately, that's the next part in our story.
With more than 280 employees, the company grew immensely and the co-founders were still running the show. However, it was facing operating and finance issues that kept troubling everyone at the top. The massive increase in subscribers didn't translate to a massive increase in profits. In a 2017 interview, Chris admitted that they bit more than they could chew, and everyone in the company felt like that. He never expected Loot Crate to grow as big as it had become, and found it extremely hard to get it working efficiently.
Investors forced Chris and Matthew to cut back on employees in order to raise the profit margin, so they fired around a quarter of their workers. At the same time, the arena of nerdy mystery box crates was officially open, and Loot Crate had competition for the first time in its existence. Chris started panicking, so he decided the best course of action to keep his Looters happy was offering even more crates, but little did he know that his move would spell doom for the company.
At one point in 2017, Loot Crate offered 27 specific niche crates, from WWE and Harry Potter, all the way to Star Trek. Although customers loved the new crates, this meant the company was forced to order a wide variety of items in small amounts, instead of doing bulk orders on a few items, further reducing the profit margin.
As crazy as it sounds, the huge number of subscriptions coupled with some bold marketing moves was what killed Loot Crate. The founders faced a dead-end: should they fire staff, hire staff, try to attract more subscribers, or lose subscribers?
Loot Crate Now
Loot Crate's growth was largely down to its YouTube promotions in the beginning, but even YouTubers turned against them when things started going down. The company that created and pioneered the mystery box world, faced backlash over late box deliveries, bad quality products, and boxes not getting to their destinations at all.
In 2019, the company announced that it was filing for bankruptcy and fired more than half of its employees. By that point, Loot Crate amassed millions of dollars in debt to companies such as Marvel, Facebook, and Trend Setters.
The business was bought by the toy company NECA on October 1, 2019, and continues to ship Loot Crate boxes to the hardcore 'Looters' to date. The story of Chris Davies and Matthew Arevalo provides a prime example of how prioritizing growth can be fatal for start-ups, especially when dealing with hard goods and international logistics!