Modsy quietly shut down while some customers were still awaiting refunds

In late June, Modsy, on online interior design services startup, abruptly ceased offering design services, laid off its designers and left customers with unfinished renovations and project orders in process. The company returned some service order charges and promised to refund furniture deliveries to those who completed a form. But more than two weeks later, tweets show that many Modsy customers are still awaiting updates.

Unfortunately for them, Modsy has made it tougher to get in touch. While the company's website remains operational, Modsy recently deleted its Twitter and Facebook pages and made its Instagram account private.

The reason is that Modsy quietly shut down in early July, founder and CEO Shanna Tellerman said in an email to TechCrunch. Business of Home first reported in June that leadership intended to wind down the "corporate and legal entity of Modsy" and that most of the company's e-commerce staff, engineers and management had been let go. But Tellerman had declined to confirm this at the time.

"Capital constraints and uncertain market conditions forced the company to cease operations on July 6 and lay off all employees," Tellerman told TechCrunch. Modsy's assets were acquired by a "new entity" out of an insolvency proceeding, she added, and some former employees were hired by the entity to take the business in a "new direction."

"Customers will be notified on next steps on how to address their needs," Tellerman said.

The entity is Pencil, LLC, legally classified as a "general assignment for the benefit of creditors" -- or ABC. ("Pencil" is a nod to Modsy's legal name, "Pencil and Pixel, Inc."). To form an ABC, a business -- in this case, Modsy -- enters into an agreement to assign its assets to a unaffiliated third party (e.g. Pencil) responsible for conducting the liquidation of the business. It's not an untested strategy in the tech industry. E-ink smartwatch manufacturer Pebble went the ABC route when it shut down operations in December 2016. Ill-fated game streaming service OnLive also formed an ABC in 2015 to sell its technology to Sony.

ABCs have the advantage of allowing assets to be quickly sold, either for cash (to pay off creditors) or to sell the company to a new owner and keep services operating. The downside is, the equity of the original company -- including any founder, investor and employee equity -- is wiped out. A former Modsy employee, speaking to TechCrunch on the condition of anonymity, said they were informed that their stock options are now worthless.

A link emailed to some Modsy customers directs them to a form for claims "outside of [refunds]," including equity interest, wages, salaries, bonuses, severance, commissions and contributions to an employee benefit plan. The wording suggests a process to recover money and benefits employees believe that they're owed, but it's unclear which claims, if any, will be successful.

Lennar, a homebuilder based in Fontainebleau, Florida, might be partially funding Pencil, according to the former employee. TechCrunch couldn't independently confirm this and Tellerman refused to comment, but it's true that Lennar was a major partner of Modsy's. In May 2021, the companies announced a collaboration to create "walkable" 3D tours of model homes using Modsy's technology. And Lennar's corporate venture arm, Len X, on its website, identifies Modsy as one of its portfolio companies.

"Together with Modsy, we are helping Lennar customers imagine their future homes," reads a post on the Len X blog. "With Modsy’s life-like designs, customers can visualize what their future floorplan will look like before it’s built, work with a designer to customize the interior design to their needs and style, and purchase furniture and decor for their new home with ease."

Upset customers

While the shell of the former Modsy team figures out a path forward, several customers say that they've been stonewalled by Modsy's support team -- or what remains of it. Five of the seven customers TechCrunch spoke with, all of whom applied for refunds in June, either hadn't heard from the company or received boilerplate emails without information about the status of their refunds. One said that they were told they'd see a refund within three to five business days. Another was informed they'd been approved for a refund, but weren't told when to expect it.

"I had $50,000 of in-process orders that are in limbo," one customer told TechCrunch on Twitter. "[Modsy has] communicated that they will be fulfilling remaining outstanding orders for furniture, but actual logistics on this point have been sparse."

Said another customer: "[Modsy's] service was supposed to facilitate returns -- that was one of the perks. But that's not happening. We have $4,500 in undelivered or unanswered return request, not counting the missing design services."

Modsy’s initial business model revolved around selling interior design services on top of an AI-powered platform. Prior to founding the company, Tellerman was a partner at GV (formerly Google Ventures) focusing on retail, 3D and augmented reality technologies.

Using Modsy's apps, property owners could create renderings of their rooms and restyle them in real time, or pay a designer for a custom layout. Fixtures could be purchased either through Modsy directly or through partner tools like Crate & Barrel’s 3D Room Designer.

Backers in Modsy included TCV, Comcast Ventures, Norwest Venture Partners and NBCUniversal. The company’s last funding round closed in May 2019, bringing Modsy’s total raised to $72.7 million, according to Crunchbase data.

In May, Modsy signaled that it would pivot to offer a software-as-a-service platform, Modsy Pro, as a service for interior designers. On the company's website, Modsy Pro is described as “online interior design software that will transform the way you do business … bring your client’s space to life with our proprietary room-scan technology, 3D renders, and easily editable and shoppable designs.”

The move came two years after Modsy made a series of aggressive cuts, slashing designer pay and reducing both salaried employees and its network of designers. At the time, Tellerman told Business of Home that it was a part of an effort to make the company "leaner." Business of Home's reporting also revealed that Modsy, in addition to piloting its own furniture line, at one point experimented with outsourcing design work to the Philippines and Bulgaria as a way to reduce operating expenses.

The Modsy Pro landing page offers a way for users to apply for early access for the still-beta product. But in light of Modsy's shutdown, the launch appears to be up in the air.