Is There a Fashion-Tech Bubble?

As money pours into fashion-tech start-ups, at sky high valuations, BoF talks to leading investors to assess the existence of a bubble and understand what separates winning investments from those that are failing.

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LONDON, United Kingdom After the dramatic burst of the technology bubble in the Spring of 2000, venture capitalists steered clear of e-commerce companies, along with most other ‘dot-com’ businesses, for many years. Particularly frightening was the spectacular failure of, which burned through $135 million of funding in just 18 months.

In fact, so sceptical were investors that when Natalie Massenet sought funding in the early years of Net-a-Porter, a business which was already showing early signs of promise, she was unable to raise money from traditional venture capitalists and instead turned to friends and family.

What a difference a decade makes. In 2010, Net-a-Porter was sold to Swiss luxury group Richemont for over $500 million. Just last week, following a 37 percent rise in revenues, fashion e-tailer Asos reached a record market value of $4.16 billion on London’s AIM exchange. Perhaps it’s not surprising, then, that venture interest in fashion-tech is now booming.

Over the past few years, large sums of capital have been pouring into young fashion-tech companies like Moda Operandi ($46 million), Nasty Gal ($49 million), ShoeDazzle ($66 million), BeachMint ($75 million) and Gilt Groupe ($236 million). In the last month alone, Farfetch raised another $20 million, while Rent the Runway closed a $24.4 million round, both with the participation of powerhouse publisher Condé Nast, bringing the total amount of financing that investors have committed to fashion-tech companies since the start of the year to over $150 million all at sky-high high valuations. By comparison, Net-a-Porter raised just under $10 million dollars in total.

And, while some companies are successfully raising more money, others appear to be stalling. When Gilt Groupe raised its last round, the company, which only recently crossed over into profitability, was valued at over $1 billion. But the company has since laid off a substantial number of staff and shut down several business units. Indeed, it’s still unclear whether the company will go public this year, a stated goal of the company’s chairman Kevin Ryan.

London-based Luxup abruptly ceased trading at the start of the month and has reportedly liquidated its operations in Hong Kong and London. BeachMint is struggling. Styleowner appears to have stalled. has shuttered. FashionStake was absorbed into And the list goes on.

Indeed, with the exception of Net-a-Porter and Asos, there have been very few big exits. Yet the money keeps coming. Are we in the midst of a fashion-tech bubble?

“Yes, too many companies don’t have a business model and don’t understand this industry,” Lawrence Lenihan, managing director of FirstMark Capital, an investor in Pinterest, Ahalife and Sneakpeeq, told BoF. “We have to stop backing stupid, business school whiteboard businesses that are ignorant of the industry and lack heart, soul and beauty. Moreover, companies that have gotten some degree of success have been so overcapitalised and their ultimate returns so overestimated that those investments will never create a return and will detract from the returns that founders and early shareholders should have gotten,” added Lenihan.

Many investors also lack a deep understanding of the fashion market. “I wouldn’t say there’s a bubble, but I do think a lot of funding has gone into businesses that haven’t been well understood by investors. As a former VC, I know how hard it is to operate across multiple verticals,” said Chris Morton, founder of fashion curation platform Lyst and a former associate at Balderton Capital (formerly Benchmark Europe). “When we were raising our seed round, some well-respected tech investors kept drawing comparisons between Lyst and online travel platforms,” he continued. “They didn’t really grasp the fundamental differences between buying a sweater and a plane ticket.”

Others are more sanguine. “There is no fashion-tech bubble. The fashion industry needs more tech investment, not less,” said Robin Klein, venture partner at Index Ventures and non-executive director of Farfetch. “Some substantial fashion tech companies have been built, demonstrating the value that can be created online; companies like Asos, Net-a-Porter, Nasty Gal and Farfetch [all of which have been backed by Index at the venture or growth capital stages]. Valuations may seem high, but all of these companies are growing extremely fast. Asos sales are up 37 percent — which high street store can claim that? There are a lot of new tech fashion start-ups that aren’t going to succeed. But that’s true of all venture [investments].”

Still, winning exits have been few. “Many companies have been funded; not all of them will succeed,” said Frédéric Court, general partner of Advent Venture Partners, lead investor in Farfetch. “The number of exits has been limited. Apart from Net-a-Porter and Asos, both of which never raised venture capital, we have not seen big exits in the fashion-tech space, except a few local flash sales companies like Hautelook (sold to Nordstrom) or Brands4Friends (sold to eBay),” he continued. “The lack of exits combined with the vast number of very early-stage start-ups in the space will generate many failures in the short-term,” he predicted. “But this is the natural Darwinian process of the start-up world. Refinancing in the space will be hard in the short-term and the ‘bubble’ will deflate… until it comes back!”

So what separates winning investments from those that will fail?

“The companies that win are the ones that develop innovative business models that provide long-term value to both its consumers and the brands it works with. This may sound obvious, but I don’t think it’s always appreciated,” said Morton. Indeed, there’s simply not enough demand to support the masses of new fashion e-commerce companies that have launched in recent years. Only those with a clear point of view and a compelling, scalable and defensible business model stand a chance at long-term success.

“First and foremost, successful businesses need a clear revenue stream and a value proposition beyond price, value and service,” said Rachel Shechtman, founder of innovative retail concept store Story and an entrepreneur immersed in New York’s fashion-tech scene. “They also tend to tap into existing consumer behaviour or familiar tendencies, rather than introducing new ones.”

As for the kinds of business models that are most likely to deliver returns, “number one, companies that make things — brands!” said Lenihan. “Number two, companies that help companies that make things reach and service their customers. And, number three, infrastructure that enables companies to understand and reach their customers better, no matter where in the world they exist.”

Court agrees: “My favourite newcomers are online brands and marketplaces. Take Nasty Gal for instance. Here is a digital-driven fashion brand that is selling affordable clothing direct, at gross margins probably well over 60 percent, without fixed retail costs and with a very low acquisition costs thanks to a superb use of social media. Another favourite is Farfetch — in which I am also an investor — which is building a global fashion and luxury e-tailer with no inventory, global reach and a uniquely curated and broad product offering.”

“Importantly, a key feature of all these winners is an exceptional entrepreneur at the helm, with a vision and the ambition to build a large, differentiated business,” added Court. Klein concurs: “Generally our approach is to invest in people first, and markets and models second. In fashion, we’ve found that entrepreneurs with an especially deep knowledge of the industry, particularly at the luxury end, seem to do very well.”

However, certain business models are not holding up to venture capitalists’ expectations.

“The companies that will find it hard to survive are those that have relied on cheap money to fund customer acquisitions expensively,” concluded Mr Court. “As an example, I am thinking of a number of subscription-based start-ups that have raised significant capital to invest aggressively on marketing, essentially on inflated ‘life time value’ assumptions. These companies will have to adapt, pivot or die,” he added, referring to companies like BeachMint. “Another example is the vast number of companies that rely on user-generated content and want to build businesses as affiliates to e-tailers. This model only works at massive scale, like Polyvore, and many small sites will not make it.”

“I do feel there is a fashion-tech bubble,” Carmen Busquets told BoF, while adding that there are still opportunities to make meaningful returns. “I feel the companies that will deliver the best returns have a good team with a track record in the industry. It’s a perfect time to incubate concepts with the right founder and team, but I recommend making small investments and negotiating a board seat. And if it works you have the opportunity to keep investing, control the board and really work together with the founders. That way, you can still make ten, fifteen or twenty times your money in seven to ten years,” she advised.

Ms. Busquets would know. She was the founding investor in Net-a-Porter, and amongst the first professional investors to see the value in online luxury e-commerce more than a decade ago after the first bubble had already burst and before venture capitalists poured money into the space.

“The other winning formula is investing in companies that have already proven themselves,” she added. “The valuation will be high, but they are already making a profit, or at least breaking even, and they need money for expansion. This way, you can still make three to six times your money in five years, which is not bad either.”

Editor’s Note: This article was revised on 25 March, 2013. An earlier version of this article misstated the name of the German flash sales start-up that was acquired by eBay in 2011. It is Brands4Friends not Brands4You.

Disclosure: Index Ventures, Frederic Court, Carmen Busquets and Lawrence Lenihan are all part of a consortium of investors which has a minority stake in The Business of Fashion.

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  1. So glad this was published. When I talk to finance people, I find that there are so many that are completely clueless on fashion and marketing in general.

    The key problem is that they have no idea how to generate demand, and are usually only interested in supply side. They have no ability to discern art, which generates demand, and can only figure out numbers with incorrect assumptions on art.

    God some fashion tech startup ideas I’ve encountered are just so incredibly stupid, all of which could have been prevented by having a single qualified editor.

    vFunct from Germantown, MD, United States
  2. Excellent article and very uplifting to know too! will certainly press ahead a lot harder now!

    Daré from London, London, United Kingdom
  3. The Brand name of Private Sales GmbH sold to eBay early 2011 is “brands4friends”. This transaction was the largest ecommerce exit in the fashion business across Europe for the last 5 years.

    SD from Milford, Surrey, United Kingdom
  4. Great article!

    Ana from Europe
  5. Excellent! I have been in the Fashion Tech space since 1999 and have been consistently surprised by how some of the most unqualified and misdirected business models get funding, then fail because a their CEO’s disconnect to the fashion industry. On the flip side many fashion industry professionals launch without sufficient tech background and also fail. The future of fashion e-commerce is expected to transform the retail experience into a showroom function that will require more tech investment and skilled CEO’s…I look forward to follow-up articles on the subject.

    Perry Preston from United States
  6. 117 startups at the nexus of fashion and technology raised $1.6 Billion of venture capital last year.

    The reality is that the fashiontech industry is one completely of it its own. It doesn’t play well with traditional fashion retailers nor is it understood by tech industry professionals and venture capitalists. There is extreme uncertainty in it as an uncharted frontier, but venture capitalists are pumping this money into it because they know that there is disruption going on and where there is disruption there is HUGE amounts of profit to be made.

    We’re looking for the next billion dollar companies that will pave the way for the rest of the industry and make the acquisitions that will fuel innovation. I think Nasty Gal will be the next Channel, but the question of who will be fashion’s Facebook or Linkedin is still wide open.

    Matthew Mountford from Crescent City, CA, United States
  7. This is a fantastic article that really captures the sentiment we’re coming across in our conversations with investors in this space. Really good to see a refocus on the basic marketing fundamentals that will separate out those companies that can deliver true value to consumers and investors alike.

    Katy Chandler, Upper Street London from Guangzhou, Guangdong, China
  8. Excellent, this is just the next place to invest in as a fashion house owner and designer.

    Kinyua Muthiga from Nairobi, Nairobi Area, Kenya
  9. Am a fashion designer ex part in all design , but I need a help

    ismail from United Kingdom
  10. Insightful article that hammers home the original idea instead of the jump on the bandwagon effect. I think there is a tech bubble in terms of fashion e-tail… however, I am seeing some amazing things from fashion based business tech companies like Fashion GPS and Editd. They have the knowledge of the industry and pay attention to the needs of the decision-makers in the fashion/retail world.

    Lynn from Chicago, IL, United States
  11. As an aspiring fashion business woman as well as an Economics major and Entrepreneurship minor at the University of Southern California, I found your article extremely enlightening with detailed supporting evidence and substantial interviews. As the internet continues to take over the world of fashion, endless amount of fashion-tech startups are arising, and with that comes a search for funding – and seemingly now with relative ease. I was shocked to realize how much money had been invested in companies I am so familiar with. In addition, as a student around the age of many evolving young entrepreneurs, learning from leading investors what they believe makes a successful company was significant and opportune. Also, you made both sides of the argument of whether the bubble exists very concise.

    You refer to various investor point of views as to why the bubble may or may not exists. However, by listing the facts on the gravity of success by some fashion-tech companies like Nasty Gal, Shoe Dazzle, and Gilt, it was difficult for me to believe why the bubble would exist except for interview opinions from various investors. As Robin Klein describes, the risk of failure within any tech-based business is high. So to concentrate the bubble strictly on fashion-based tech companies seems unfair. As we have seen such high numbers result from the success of these companies, why not continue to invest in new ideas because the potential seems to outweigh the risk? In addition, as a student of one of the top Entrepreneurship programs, we get the chance to meet numerous entrepreneurs who all consistently tell us to worry less about the business model and more about personally convincing your potential investor and maintaining a passionate and driven attitude about your product or service. If investors became scared at the possibility of a bubble ready to pop, companies with real promise could be overlooked. A perfect example of this, as you also happened to list in your article, is Net-a-Porter. Natalie Massenet had difficulties raising money and had to pivot to private investors instead of the typical venture capitalists because so many had been scared from the previous technology bubble burst. Personally, I hope investors do not get too scared because denying all the brilliant ideas out there from such budding talent would be extremely unfortunate.

    Gabby from Los Angeles, CA, United States
  12. Seeing V.C. and tech people enter the fashion space is a bit like seeing an East Coast college boy walk into an Old West saloon fresh off the train from Boston. The rules he knows aren’t enough, and some common sense from home will get you killed out here.

    At the same time I see so many fashion designers completely failing to hit the mark on elevating themselves to tap into the possibilities of the online world.

    From both sides I see so many of the same mistakes over and over.

    If anyone needs a fashion-media-tech translator, I’m available.

    @fashiontechguru on Twitter

    Charles Beckwith from Brooklyn, NY, United States
  13. We wondered the same thing about flash sale sites in a recent blog post. It appears that bubble is in the process of deflating (perhaps with the exception of Zulily). Whether or not Gilt can put together a successful IPO will be a good litmus test.

    Whitney Faust from Memphis, TN, United States
  14. I share sentiment of other comments – good article. I also share this assessment. Certainly it supports our own business venture (No Place Like Holm) which is a relief!

    Will be interesting to find out directly…. we are now at the stage of seeking investment. Exciting times.

    Steve Johnson from Reading, Reading, United Kingdom