Op-Ed | Why Fashion is the Next Big Thing in Venture Capital

The multi-trillion dollar fashion business is ripe for disruption and venture capitalists who seize the opportunity will see huge returns, argues Jay Deng.

Shopper carrying bags | Source: Reuters

NEW YORK, United States — Software as a service (SaaS), enterprise and mobile all have one thing in common: they are the bread and butter of most venture capital firms and angel investors. You would be hard pressed to find a VC who doesn’t have a portfolio dominated by tech start-ups.

But as the global economy evolves, we are beginning to see disruptions in areas that were once ignored. However, there is still one industry that has yet to go mainstream with investors: fashion.

It’s no surprise that fashion isn’t really on the radar of most traditional Silicon Valley investors — VCs aren’t exactly known for their knowledge of fashion and most see the industry as gaudy, over the top and a domain reserved only for women.

But as a former fashion designer turned venture capitalist, I see dollar signs — and lots of them. Let’s take a quick look at the numbers: a $1.2 trillion market size, expected to grow to $2 trillion by 2018. To put that into perspective, the global SaaS market is around $20 billion. Cloud services is $131 billion. And enterprise software is $120 billion.

Overall, the fashion and apparel industry is a juggernaut and it’s easy to see why: everyone needs clothing and it’s a product that we use every day. And that’s the beauty of fashion and why it holds untapped potential for VCs; it’s the perfect combination of market size, unending global demand and an industry that has yet to be fully disrupted. Indeed, there are still many problems that need to be solved in the fashion industry and the payout for solving them will be significant.

Affordability

It’s no surprise that people want to look good for less. Companies like Fab are trying to solve this problem, but I believe they and many others are only beginning to scratch the surface. Subscription boxes like StyleMint and Popbasic will continue to be popular, but there is still room for innovation when it comes to affordable fashion. I also see a future where crowdsourced apparel will become mainstream.

Big data

One of the most vexing problems that retailers continue to face is knowing what to buy and stock on their shelves. Unsold inventory costs retailers billions of dollars a year and only now are we beginning to see startups like Editd take a big data approach to solving this problem. With millions of retail stores around the world, a big data solution to fashion inventory can become a very lucrative market.

Manufacturing

How can we make the best quality clothing while maintaining good profit margins? Companies like Nike and Lululemon have long struggled to balance both, while trying to maintain a positive image of their overseas factory workers.

Makers Row is one startup trying to bridge that gap and although their solution is not perfect, it’s a start. As demand for high quality and domestically made apparel rises, it will give way to more start-ups like Makers Row who are trying to solve this problem using SaaS and other technologies.

Men’s fashion

Nowadays, being “metrosexual” is no longer frowned upon. Men have a strong desire to dress well and we are beginning to see start-ups like Frank & Oak take on this burgeoning part of the fashion market.

Sharing economy

Start-ups like ThreadFlip will play a significant role in the industry. We’ve already seen how the “sharing economy” model can be successfully applied to fashion — just look at Rent the Runway.

And, believe it or not, there are billions of dollars worth of unused clothing just sitting in women’s closets and finding a way to monetise that will be incredibly profitable. In fact, I predict that the next big fashion start-ups will tackle this problem head on and those who succeed will be richly rewarded.

Retail/E-commerce

Only 10 percent of clothing is purchased online and there is a good reason for that: fit.

EBay recently acquired PhiSix Fashion Labs, which has come up with a technology that creates 3D models of clothing from photos. Now online shoppers can see exactly how something will fit no matter what the item is. And they aren’t the only ones trying to solve the problem — an influx of other start-ups are coming up with unique and innovative technologies to help online shoppers find the perfect fit and reduce returns for online retailers. The acquisition market for these types of start-ups will be significant and eBay’s purchase of PhiSix is a good sign of things to come.

The good news is, most major VC firms have at least one fashion start-up in their portfolio and companies like BirchBox, Frank & Oak, Fab and Zulily have all proven to be lucrative investments. We are also seeing more specialisation in fashion with venture firms like Forerunner Ventures and Burch Creative Capital, and accelerators like TrueStart and New York Fashion Tech Lab focused mainly on fashion and retail start-ups.

In the end, fashion and apparel is a multi-trillion dollar market that should not be ignored by Silicon Valley. It is ripe for disruption and those who fund start-ups that provide successful solutions to the problems above will see huge returns.

As for traditional VC firms, if you are wise enough to see the huge potential in fashion, you will starting looking for your next hires, not at Stanford, but in the fashion industry.

Jay Deng is an angel investor and venture capitalist based in New York. He is also the founder and CEO of Diva For Less.

The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.

How to submit an Op-Ed: The Business of Fashion accepts opinion articles on a wide range of topics. Submissions must be exclusive to The Business of Fashion and suggested length is 700-800 words, though submissions of any length will be considered. Please send submissions to contributors@businessoffashion.com and include ‘Op-Ed’ in the subject line. Given the volume of submissions we receive, we regret that we are unable to respond in the event that an article is not selected for publication.

Related Articles

Post a Comment

11 comments

  1. I’ve always wandered how the apparel market size is calculated. Does the $1.2 trillion figure only relate to retail sales or everything from the purchasing of materials, manufacturing, wholesale, retail and other costs included in the making and selling of apparel?

    Ingvar Helgason from United Kingdom
  2. Great article. My brother and have started an eco-friendly apparel company (www.chaosthreads.com) on a shoestring budget. We built it as an commerce model, now we’re in the process of expanding the line and find ways into retail shops. It’s an exciting time to be involved in the fashion industry.

    Damien Rizzello from Boulder, CO, United States
  3. Awesome insight and fantastic foresight Mr. Deng. Highly agreed an all fronts. Thank you!

    Lindsay Mayer from Germantown, TN, United States
  4. Where were you a designer Mr.Deng?

    Seth Friedermann from Brooklyn, NY, United States
  5. I wonder the same thing about that as well? How is the market size calculated?

    Yvonne Ngundam from Elkridge, MD, United States
  6. “I also see a future where crowdsourced apparel will become mainstream.”
    Think you missed Etsy.

    Tassavur Shaikh from India
  7. Great subject Mr. Deng.
    As a fashion designer who now works with emerging designers helping them build their fashion brands i would say that the biggest reason why VC don’t like to invest in fashion is due to high risk involved (especially compare to Silicon Valley). The fashion industry operates differently than other industries, it has its own rules and they are dif than what VC are used to. Therefore it is very hard for VC who did well in other industries to understand and accept that it’s not the same, and by the time they do they already spent more than they wanted to and they leave. I have seen that way too many times.
    I will though agree that nowadays fashion brands need VC in order to build a big brand, as oppose to 20 and more years ago where a designer had much bigger chances of building a big brand with their own capital, today it’s almost impossible.
    Good point about E-commerce being a big opportunity for brands to grow, especially since it allows them for better margins which is the biggest issue for young brands.
    Manufacturing domestically was always and still is strong when it comes to better products/markets (we produce over 90% of our customers products in the USA), the challenge is for mass market production and I’m not necessarily convinced that the solution will come from tech companies, i think it should come from the state/city/government who can encourage the movement with designated zones, tax breaks etc.

    Boaz David from New York, NY, United States
  8. Elated to be founder of one of these emerging fashion crowd-sourcers, global peer to peer shoes, BOOTLEGMARKET.COM. We think we are slated to turn the $80b shoe industry on its head. This article reiterates our entire business model. Thank you!

    Sarah Ellison Lewis from Austin, TX, United States
  9. All credibility was lost with “Fab.com has proven to be a lucrative investment.” $300 million in funding with less than $100 million in revenue, negative profit margin and still going down.

    Karen Chow from New York, NY, United States
  10. Great read! I think VC funding can help the fashion industry get out of their archaic ways by implementing technical solutions.

    My company Couture.io aims to solve these problems by centralizing data, automating processes, and making it easy to manage physical products using software.

    I’ve seen too many companies stuck in their ways refusing change. These companies are so focused on making money that they fail to realize how much money they could be saving. With advances in cloud computing and centralization there shouldn’t be employees out there emailing data back and forth using spreadsheets. There is a lot of room for error, not to mention the headaches associated with spreadsheet versioning. We’ve created databases and web applications to handle this.

    I reach out to different businesses in the fashion industry and ask them this: What is the biggest problem or pain point in your everyday job? If I could build this app for you, what features would you like to have in it.

    I often encourage them to think of the best case scenario. Often times I tell them that there already is an app out there that does that. Many people don’t realize what they need until they think deeply about it.

    If their problem doesn’t have a solution, I think about how I can use the latest web technologies to build it for them. Our most recent solution has been for the fashion dropshipping industry. The need to create a centralized system to manage inventory, shipping, and logistics saves companies money on customer service and streamlines the fulfillment process. You can read more about our service at http://www.couture.io

    We’re very interested in talking more to anyone with ideas on what types of solutions are needed and the type of technologies that can make that happen. Glad to see this article. I hope it sheds more light on areas that are waiting to be disrupted.

    Dan Carr from San Diego, CA, United States
  11. Hi Jay,

    Although I support your sentiment, I also predict a lot of VC money will be lost and wasted too. It’s already happening in my opinion. I see a lot of gimmicky tech that will not achieve their (cl)aims.

    The successes will be those that focus on the customer and not those trying to force a customer to use the tech.

    The other big issue is with algorithms is they learn from customer history. So… if a customer buys a garment and leaves it in the wardrobe, never worn (like many women do), this will be providing faulted history. That’s before I go on about how fit is linked to preference, bodies change over time and how lifestyle change can totally alter your wardrobe. Move from Miami to Inverness to get my point.

    Don’t get me wrong, there is massive opportunity. VC just need to invest in subject matter experts. The kind that know the customer… like new start up, No Place Like Holm.

    Steve Johnson from Reading, Reading, United Kingdom