On May 2, Nau, a trendy and fast-growing apparel maker, dropped a bombshell on its 95 employees. It suddenly announced it was out of business, closing its five stores and putting its assets up for sale. It was a crushing setback for the Portland, Oregon, company, which had launched just 15 months earlier. Ian Yolles, the company's marketing chief, recalls reading a statement to the staff members, thanking them for their efforts. "I was having a very hard time getting through it," he says. "I started to cry."

Who wouldn't have, given Nau's promising start? In 2005, half a dozen outdoor-clothing guys got together at Portland's Urban Grinds coffee shop to sketch out their new retailing concept. Times were good, and they were feeling supremely confident. Their big idea was to combine the eco-friendly and mountain-climbing chic of Patagonia with the fashion-forward urban cool of, say, Prada. Not only would their clothes be practical on the trail, but they would look sleek and hip in the city as well. Nau would design its own fabrics with new sorts of eco-friendly materials. Even Nau's retail outlets -- the plan called for 150 of them -- would be constructed from recycled wood and plastic.

The team also decided to funnel 5 percent of sales from each item to dozens of worthy nonprofit organizations that buyers could choose from. The clothes would be pricey, but shoppers could feel good that by buying a $40 T-shirt or a $350 jacket, they would also be doing some good.

The timing was impeccable, or so it appeared. The green movement was in full swing, and a booming economy was giving rise to a sort of mass philanthropic movement. But Nau also had its eye on running a successful business. Stores would be about half the size of typical specialty apparel stores, with tiny inventories, representing a huge cost savings. To make these small stores work, Nau would offer shoppers a 10 percent discount at the register in exchange for Nau's shipping clothes from its warehouse directly to their homes.

Investors warmed to the concept and quickly put up $35 million. Among them were private equity firm Tudor Capital; Steve Luczo, a former CEO of the disk drive company Seagate (NASDAQ:STX); and Stephen Gomez, a former executive at Nike (NYSE:NKE).

Consumers went nuts when the first stores, with a striking, space-age interior design, opened in Portland, Chicago, and Boulder, Colorado, in March 2007. The media buzz wasn't far behind. "Nau made the stigma of itchy and sticky eco-fabrics a thing of the past," wrote Outside's Go magazine in the fall of 2007. "The pants are so cleanly designed as to be practically invisible," chimed in Men's Vogue. And Treehugger.com, a widely read green blog, wrote in December 2007 that Nau's "level of tailoring is incredibly detailed."

The Nau team, led by CEO Chris Van Dyke and Yolles, both former Patagonia and Nike marketing executives, as well as Mark Galbraith, recently a top Patagonia designer, wasted no time ramping up. Among its moves: investing in an IT infrastructure powerful enough to handle $250 million in annual revenue and striking deals with fabric makers in the U.S., Hong Kong, and elsewhere in Asia.

The company, with its five stores and four more under construction, assumed additional financing would always be around the corner. Then the credit crunch hit. With no recourse to bank financing, the team implored its biggest investors for additional funding. But the investors who had been so generous just a few months earlier clammed up. "Everyone on the board understood we had gotten in too far to turn around and pare this thing down," says Gomez, then board chairman of Nau. The money was gone. The board voted to close down Nau's stores and suspend all business.

Nau's management was stunned. The day after the closure, Yolles and Galbraith contemplated life after Nau and felt a deep emptiness. "We had poured everything into this," says Yolles. "I just could not believe it would end -- and end so quickly." Galbraith looked over his designs and wondered how well they would have sold. "We had only one season to get traction," he says. "If we had just gotten one more season, then we would have been OK."

The executives had just seen all their equity in the company and three years of hard work swept away. No one stood to lose more than CEO Van Dyke, who had cut short his retirement to help launch Nau. After the board put Nau into liquidation, Van Dyke organized a buyout effort to acquire the Nau brand and its website. With his bid, Van Dyke agreed to dissociate himself from the board and the rest of management to avoid any conflicts of interest. His plan was to relaunch Nau and keep its generous philanthropy program and strict sustainability standards. "We were pushing the envelope and taking risks," says Van Dyke. "We were trying to change the model."

The company began to arrange the sale of its assets. But Yolles and Galbraith, like Van Dyke, remained committed to seeing the Nau brand and what it represented continue. Along with several other members of the Nau team, they huddled around a large coffee table in the company's now-quiet and cavernous offices. "We recognized there was incredible value in the product and in the brand," says Yolles. Could they somehow find a way keep it alive?

The Decision The group, with the board's knowledge, set out to find a buyer who would keep the business going. It first went about preserving business relationships. "We called up factories," says Galbraith. "They agreed to hang on for a period of time to see if something could get resurrected." To attract a buyer, the team decided it would need to overhaul Nau's business plan, which it realized was too idealistic and too ambitious. Rather than attempt to ramp up a huge number of stores, the execs now proposed that Nau should grow slowly and organically. They also kicked themselves over how they had run the company. They could have gotten into wholesaling. The website could have been stronger. Perhaps they overextended themselves by offering too many styles. No aspect of the business was left unexamined.

After dozens of inquiries, Yolles and Galbraith got the attention of Gordon Seabury, the CEO of Horny Toad, a large casual-clothing line in Santa Barbara, California. They felt Horny Toad's outdoorsy image could be a good fit. And they liked linking the Nau brand to the back-office support and infrastructure of a successful apparel maker.

Seabury's initial reaction was lukewarm: "I still wasn't clear about how we could help." But on a visit to Nau's headquarters, Seabury liked what he saw. "The Nau team gave us an unforgettable presentation of what was on the drawing boards," says Seabury. He offered to purchase Nau for an undisclosed sum, trumping the former CEO Van Dyke's bid and several other bids. Seabury agreed to hire Yolles and Galbraith, who would keep doing more or less their same jobs. Nau's line will share Horny Toad's distribution network and is set to be sold in such stores as Uncle Dan's in Chicago and Paragon in New York.

Van Dyke says he has no hard feelings toward Yolles and Galbraith and understands their motivation for wanting to keep Nau going in a new if, in his view, watered-down form. The 5 percent sales to charity, for instance, was dropped down to 2 percent. "It was clear to me the direction of Horny Toad was going to be philosophically different," Van Dyke says. "They did not want to mandate in the bylaws specific corporate giving percentages, as we had done, and they did not want to specify that social and environmental responsibility be part of every major business decision."

The fall line is expected to go on sale in dozens of stores around the country. Yolles and Galbraith no longer expect to revolutionize the retail apparel industry with their sustainability agenda. Nor do they still hope to lead the charge with a massive store expansion. Still, just making a cool line of clothes in an environmentally friendly way seems plenty good. Says Galbraith: "Now we have that second season to prove we were right."

The Experts Weigh In

Keep your own identity

What Nau has done right is that its intention has always been pure and clear. It never let ego get in the way of bringing a sustainable clothing line to the public. It asked, "How do we scale back without compromising integrity?" That it bounced back, distributed in other retail outlets, or just sold its clothing and experience online is all good. If Horny Toad is invisible to the brand and provides it infrastructure and support, then it is fine. If Horny Toad plays a more central role or infringes on Nau's brand in any way, that could be really bad. The Nau brand had more buzz and sex appeal than the Horny Toad brand for a reason.

Colette Brooks
Big Imagination Group
Los Angeles

Better late than never

Nau built a brand and a cultlike following in fairly short order. But it tried to break too many conventions at once, from its mission statement to its merchandise to its distribution model. It didn't take much in terms of hiccups to upset that, and once Nau locked in on a social commitment, that was going to be hard to change. The new plan has a good chance and is arguably what it should have been all along, with a slower ramp-up and a less ambitious plan as well as a bit less philanthropy. Will people come back, and will they do it in sufficient numbers? Nau was a phenomenon. Whether you get a second act as a phenomenon remains to be seen.

Joel Makower
Executive Editor
Greener World Media
Oakland, California

Don't try to do too much

Committing to a lease and a build-out without having sufficient cash on hand is pretty risky behavior. I make it a point to have enough cash on hand to cover retail expansions. Nau had big dreams and went for them. But it takes a lot of capital to build out locations and sign leases. Nau didn't understand that the first time, and it seems to be accepting this reality in the second model. But Nau still needs to be careful that it doesn't get ahead of itself and its customers, even within the constraints of Horny Toad. You have to be very creative and flexible about what you have and where you can take it. But it is impressive that Nau has been able to try again.

Jane Park
Julep Nail Parlor

What would you do?

Could the Nau team have found a way to keep the business independent? Or was the sale the only way to keep the brand alive? Write to us at mail@inc.com, and tell us what you would have done.