The FashionStake Diaries | Part II: Raising Funding

FashionStake Screenshot | Source: FashionStake

The FashionStake Diaries is a four-part series that giving a behind-the-scenes look at the crucial first months of a crowdfunding fashion startup, seen through the eyes of its founders. In Part I, we examined how FashionStake got from idea to traction with $1000. Today, the founders reveal how they were able to finance their business.

NEW YORK, United States — Our business school professors used to say that startups were about getting four things right: the Context, the Opportunity, the Deal and the People. Having focused our early efforts on understanding how fashion has changed forever with the rise of Web 2.0 (the Context) and how an online marketplace connecting designers directly with the public could yield benefits for everyone (the Opportunity), it was time to turn our attention to funding (the Deal) and acquiring talent (the People).

Not all investment paths are equal

Consumer internet marketplaces like ours typically have “land-grab” dynamics. Whether the marketplace is for hand-made items, for example like Etsy, or discounted deals, like Groupon, a first-mover can capture 80 percent market share with later entrants left to fight over the remaining 20 percent.

Network effects are the main force at work here: great startups reach a critical mass of suppliers and buyers, which attracts even more suppliers and buyers. It’s the secret sauce that makes competing with established marketplaces like eBay a tough task.

But of course, getting to critical mass fast usually costs money. To start with, you need to build great products and hire great people. This is the main reason why we sought out external investment.

We recently closed our first round of funding with Battery Ventures, a Silicon Valley-based venture capital firm, and a handful of fashion industry angel investors. We’ve found that working with a well-known VC has many benefits: they have a blue-chip reputation, are well-connected — especially when it comes to sourcing employees — and can participate in, or lead, the next round of financing. But we’ve also found that angel investors from within fashion are a great complement to a VC, as they’ve operated within the industry themselves and can offer targeted advice.

Fashion startups are different

For a fashion startup, investor dynamics are unique. The average VC specializes in a few “themes” (consumer internet, enterprise software, cloud computing etc.) and builds a portfolio of companies within those themes. Most fashion-tech startups we’re seeing now are two-sided platforms that would technically fall under the consumer internet theme.

That said, until now, fashion startups have not attracted significant investor attention, so there is sometimes an investor education process that needs to happen. We found that sending a pre-reading document to investors made meetings more productive. Still, many of the VCs we met with had never made a fashion investment before.

How to pitch investors

In our treks to and from New York and Silicon Valley, the world’s largest venture capital and private equity hub, we learned three important lessons. First, present a story, not a slideshow. When meeting investors for the first time, we learned to tell a succinct chronological narrative from the birth of our idea to the present day, focusing on key turning points and milestones.

Secondly, don’t contact investors. Well, at least don’t contact them directly. We were lucky enough to have generated enough interest in the press that VCs and angel investors came to us.

While this may be atypical, the best way to get to a VC is to be recommended by someone the investor trusts. Usually this will be a partner at their firm, a peer at another firm, a close friend, a startup lawyer or accountant, or a well-respected startup CEO. Your job as the entrepreneur is to get introduced to an investor through these people. We spoke to a 15 year VC veteran who told us he has never invested in a cold-call. Introductions matter.

Finally, focus on opportunity-team fit. After the first few meetings, we had focused our story on how our backgrounds and specific professional experiences fit the opportunity we presented. VCs and angels are always looking for the advantage of domain expertise in their teams. If you don’t have it, find it and your team becomes instantly more fundable.

But after all is said and done, it’s important to put the funding process into perspective. We think about it less as an end and more as a ticket to play.

Our Next Step: The Countdown to Launch

With the business model in place, designers signed, and funding secured, we’re on track for our September 1st launch. In our next posts, we’ll reveal our designers and share our reflections on the eve of launch. And most importantly, you’ll be able to click through and see the site for yourself.

Vivian Weng and Daniel Gulati are co-founders of FashionStake, a new online marketplace for fashion, launching September 1, 2010.

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11 comments

  1. This is very intriguing… I’m waiting in wings to see how this develops, when I first read through I thought this is a recipe for disaster. However, having pondered over their facebook page it becomes painfully obvious this is no democratic fashion; they can envelope and sell this with whatever gimmick, this is pure non-pluralistic branding with a giant PR machine at the wheel. Honk honk, $$££££ .. Ultimately I think consumers on mass want to buy into an ideal, they need a narrative subliminally sold to them…fashionstake may fall short of that as on the surface they’re attempting to provide the opposite. Will be fascinating to see how they plan to action this campaign from consumer through to operations and what degree of influence the consumer is provided with… The glaring problem fashionstake has is any established brand can open a dialogue with their consumer, the question is whether it damages the image of the brand and whether it’s operationally feasible and economically justifiable?

    moi from Exeter, Devon, United Kingdom
  2. I’m skeptical. “Share in Clothing and Cash…” As if designer businesses pay dividends. Why not just go shopping?

    St.Valentine from Rancho Cordova, CA, United States
  3. I read the first article last month and loved the idea and the lessons shared. But this one leaves me wanting more.. Who are the designers? What exactly is their revenue model? How much money did they raise? I’m keen to see the actual site before I make a judgment on whether this is something I would use as a fashion consumer.

    jen coval from West Babylon, NY, United States
  4. I agree with the previous posts. I wish them all the best, but it’s unlikely this will work in it’s present form. I predict, they will be need to tweak/change the model as they get further along. The idea that there are enough arm chair fashion investors who want to take a punt supporting a designer seems naive at best. That said, they’ve convinced VCs to invest. I think the inventors of this product have an ace up their sleeve they have not yet revealed because the plan now seems like a loser at face value. The plan may be to use the absurdity of their business model to get lots of press and then “flip” the game once they traffic shows up.

    Jarvis from United Kingdom
  5. I like the overall concept and I’m eager to see if they can execute better than CatWalk Genius who have already tried fashion crowdfunding. However, given that this is a diary entry about fundraising, it would have been helpful to get a sense of the size of the raise and their business model. Also, they discuss the importance of assembling a great team but don’t tell us their anything about their backgrounds (other than they went to HBS) or any details about the talent they have acquired. Entrepreneurs’ track records and previous experiences count for so much during VC discussions (especially with a seed raise like this) and it’s hard to take their advice seriously without knowing what these guys have accomplished prior to FashionStake e.g. are they serial entrepreneurs and did that give them credibility with VCs? The only take away from this article is that entrepreneurs shouldn’t cold call VCs which isn’t news to anyone. I would think that if they want to avoid this diary series coming across as pure marketing prior to their launch, it would be helpful to more substance to educate and inform fellow fashion entrepreneurs.

    Ella9 from Harrow, Harrow, United Kingdom
  6. I don’t think enough has been given away to really judge accurately whether the site will work or not. Its true others have failed in the past (Catwalk Genius) but I’m sure these HBS folk have thought about all the downfalls and how to overcome them.
    I wish them luck and am excited for the launch, to actually experience the site for myself and then form an opinion based on that as opposed to basing it on a couple of diary entries.

    Becca Mallouf from West Babylon, NY, United States
  7. I believe this is going to be a ground breaking consumer and fashion designer focused business. It will allow fashionistas to get a first look at their favorite designer lines, as well as give the average clothing buyer a chance to get desirable clothing at a more affordable price. Lastly, and most importantly, we can now be a part of the brand’s entire process, from initial design to implementation.

    Sherman from West Babylon, NY, United States
  8. It’s certainly an interesting concept and they seem to be going about it in a transparent manner. I also think that it says a lot for them that they have secured funding for this – and although similar ventures have failed in the past, it could merely be that Fashionstake is at the right place at the right time.

    roughluxegirl.blogspot.com

  9. This is a very exciting space these days. I love the idea of being able to be part of the process. A few fashion startups are taking a go at different aspects of this idea, like lookbook.nu on the inspiration side, and senseofashion.com on the marketplace side, and I just can’t wait to see how big they will be able to get. I hope they will succeed, because fashion is the winner here.

    Angel from Ashdod, HaMerkaz, Israel
  10. The quality associated with independent fashion designers and their start-ups are impressive and admirable. As a consumer, it’s cool to have clothes that no one else does, though they can be pricey.

  11. Interestingly enough, Catwalk Genius is launching its first public funded collection next week. They are working with Katie Eary and the collection looks pretty cool. It will be interesting to see how this progresses and who their next collaboration will be with. Definitely one to watch.

    Mark from Saint Peter Port, Guernsey (general), Guernsey