LONDON, United Kingdom — Yesterday, Women’s Wear Daily published an in-depth report about Luxury Society, a project which was first announced on BoF in March of this year. Since the Luxury Society Whisper Campaign began, more than 2000 luxury professionals from over 50 countries have joined the community.

Accompanying the main piece was an interview I did with Cate Corcoran of WWD  on the Social Media Revolution in the fashion industry, which I’m delighted to share with BoF readers today.

Luxury Society Co-founder Imran Amed shares his thoughts on social media: what should luxury companies be doing with it? what is the business benefit? How is it changing society and retail?

On how the Internet changes communication:
“The internet does change the way people communicate, and corporations are beginning to come to terms with the fact that they cannot control everything. The luxury industry always wanted to control the way it communicated about brands. But the way the internet works is you don’t have control. What you have is a voice.
On why fashion companies are beginning to use social media, such as blogs, Twitter and Facebook:
Part of it is that advertising budgets have been slashed so much they’re looking for ways to communicate more cheaply. This is a moment of turning, a shift in the way people think about mass communications and communicating with the customer. It’s not just one way anymore, it’s a many-to-many conversation.

On the two-way nature of social media:
This is one of the things people are still coming to terms with in the industry. [social media] is not about broadcasting information. It’s also about social listening: using the tools to listen to the conversation and take feedback. the real meaning of your brand lives in these conversations. Lots of people think it’s about broadcasting because that’s the way media used to work. In the previous incarnation of media, it was one-way communication. It’s not enough to tweet once a day about what you’re selling or to put up a Facebook page.

On social media and mass events:
If you looked at facebook [the day] Michael Jackson died, something like 40 to 50 percent or higher of posts in people’s news feed was people using those platforms to say what they think about Michael Jackson. what you see is a whole bunch of different people’s emotional reactions to an event that everyone is living through together. When princess diana died, there were only 10 people I could speak to about it in the period because they were in the same physical space as me. Now I can share an experience like that with literally hundreds, and on twitter thousands, of people i don’t know. It changes the way people experience mass events. I think the fashion industry can take a big lesson from that — how do you create interest? It’s no longer about keeping people out and creating exclusivity, it’s creating something people want to be part of and enabling them to share it.

On what the luxury industry should do:
Our industry needs to sit up and take note and be open to innovative new things. it’s always scary when things are changing faster than we can understand what’s happening. ten years ago, everyone was walking around saying there was no way anyone would buy luxury goods on the internet. Now in 2009, that’s the only segment of the Luxury industry that’s rapidly growing. This [economic] crisis has created an opportunity. Fashion companies have started using fashion films on the internet to share stories and make an emotional connection about their brand. Chanel and Dior are experimenting with short films that get shared and viewed hundreds of thousands of times at no distribution cost to the company.

On the connection between social media and revenue:
If you have an engaged group of fans on a web site coming regularly to talk to each other, it will probably end up driving further dedication and loyalty to the brand. you’re probably going to create an impact on revenue and sales. People say it’s hard to make a connection between social media and sales. I think that’s true, but it misses the point. It’s not only about the impact on sales. it’s also about engagement. Our industry used to be based on personal, one-to-one relationships between proprietors and customers. As the luxury industry has expanded into a global industry, some of that personal connection has been lost. new technology enables us maybe not to replace [those relationships], but it lets us feel a little closer to the customer. and it lets customers feel closer to us.

On how the Internet has affected the fashion cycle:
The fashion cycle is a little bit of an anachronism. We still show clothes in february and they’re not available until July or august or september. by that point, images of the collection have been seen all over the internet and discussed ad nauseum on blogs and social networks and on Style.com, and by the time it reaches the store, people are already [tired of it], it’s done. The fashion cycle does not fit with the speed of communication. Instead of showing things on the runway [that won’t be in stores for several months] we should be showing things that can be bought right away. net-a-porter did this well with roland Mouret and Halston. instead of being more responsive, we’re doing more seasons and more collections, and that’s not the solution. the solution is to give people what they want when they want it.

Courtesy of Women’s Wear Daily.

NEW YORK, United States and LONDON, United Kingdom – Some say that during a downturn, there is a flight to the high-end: buy fewer of the more expensive pieces that will stand the test of time and do away with impulse fashion purchases. There is also a rush to discounters: buy the same quantity of goods, but at lower prices which enables consumers to keep the newness factor, albeit at inferior levels of quality. Therefore, it is said, the middle market suffers.

Whatever is the conventional wisdom, if recent moves by some of the industry’s most successful fashion executives are any indication, there is a significant opportunity to be captured in the middle market, which has lagged in recent years. They are putting their money where their mouths are.

In January of this year, Jane Sheperdson finally announced her next big move after transforming Topshop into one of the world’s most innovative retailers. Sheperdson revealed that she had successfully executed a management buy-in at Whistles, the tired mid-market brand, in cooperation with the beleaguered Baugur Group, Whistles’ major investor.

She told The Times of London of her plans to revitalise the offering. “I think I’m quite representative of a certain sort of woman who is darting round but hasn’t found somewhere that fully satisfies her, she said at the time. “And that’s what I would like to change.”

Along with her management team, some of whom worked with Shepherdson at Topshop, the fashion dynamo now owns a reported 20% of the business, and will share in the upside of the value she creates.

Then, in July, Robert Bensoussan of Jimmy Choo fame (and fortune) unveiled the latest investment by his company Sirius Equity, in L.K. Bennett, another dusty mid-priced label with a significant presence in the U.K. In an email memo announcing the transaction, Bensoussan said “that the business is divided equally between shoes and clothes. We plan to develop the company not only in the UK but internationally.”

Not to be outdone, Tory Burch, the US label with an estimated $200m in sales, was featured in a front-page article in Women’s Wear Daily revealing that Burch is looking for an investor with $300m to take a 30% stake in her business, valuing it at over $1 billion. Though the valuation may sound unreasonable, clearly Burch believes that she has hit on something with huge value and growth potential.

Indeed, many major U.S. and International retailers I have spoken to rave about the brand. Burch’s Reva ballerina shoe, which is manufactured in Brazil, is perennially out of stock and still in huge-demand. And, while the Tory Burch collection tends to be found on the younger-skewing Contemporary departments of many US retailers, it has a slightly older following amongst ‘Soccer Moms’ and career women.

The Tory Burch brand is already far more modern and stylish than what is on offer at LK Bennett or Whistles, but all three brands do have two important things in common. First, they are all targeted at women in their 30′s and 40′s who aren’t slavish to trends. Professional women often complain that they can’t find clothing that is age- and role-appropriate. So much of what is available is targeted to twentysomethings with different lifestyles and body-types.

Second, they are each positioned in the middle-market, offering decent quality at prices that are perceived to deliver honest value. After years of fast-fashion purchases, consumers’ closets are full, and the basic constraint of limited storage real estate means that purchases are being made more carefully. Some women, it seems, have tired of dropping $2000 on a handbag that is dated in a season or two. But, they are also finding that the latest season’s copies from Zara are just not good enough, even if the prices are rock-bottom.

So, with the economic downturn putting a squeeze on spending, the smart money is apparently on a better-quality, mid-priced fashion offering. We’ll see if the strategy works. Those career women may not be pressed for choice for long if Bensoussan, Burch and Shepherdson have anything to say about it.

Tory Burch photo courtesy of W Magazine.

WWD reports today that Style.com has concluded an agreement to sell advertising on the Sartorialist blog maintained by Scott Schuman, a former fashion industry staffer who left a fashion sales showroom to create one of the best known blogs in the fashion blogosphere.

Women’s Wear Daily said:

A fashion label may get the best endorsement when its wares show up on a well-dressed city dweller photographed for fashion industry veteran Scott Schuman’s popular blog The Sartorialist. But for those who want more direct brand promotion, Style.com and Men.style.com will begin to sell ads forThesartorialist.blogspot.com beginning Sept. 1….

…The partnership is the first time the CondéNet properties have sold ads for a brand outside the company stable. Schuman’s blog, where he posts commentary on stylish men and women on the street, attracts more than one million unique visitors a month. He also pens a regular column for GQ and guest-blogs on Men.style.com and Style.com. "The Sartorialist reaches the person who really cares about fashion as a form of self-expression. He chronicles very chic people and his constituency are the people he photographs," said Dee Salomon, senior vice president of CondéNet. The site seeks to attract upscale automotive and consumer electronics as well as fashion brands. Style.com and Men.style.com and The Sartorialist will share advertising revenue generated from the blog. — WWD, 16 July 2007

This is, of course yet another sign of the increasing importance of fashion blogs as a communication vehicle for fashion brands, and it was smart of Scott to partner with CondeNet, who understand his demographic and who already have the advertiser relationships in place to generate ad sales.

Yet, having "upscale automotive and consumer electronics" ads next to Scott’s  eye-catching photos does raise some questions. Will they ruin the clean lines, aesthetic simplicity and fashion purity of the site?  Methinks it will be best to keep the ads focused on fashion and integrate them as cleanly as possible into Scott’s site, so as to maintain the integrity of what the Sartorialist’s 1 million monthly visitors are interested in: the photography.

Photo clip courtesy of Scott Schuman.

For years now, the Yves Saint-Laurent brand has been a drag on the otherwise strong results posted by many other fashion brands in the Gucci Group, owned by parent-company PPR. Most recently, Bottega Veneta has been on a tear with strong financial results (eclipsing YSL’s top line revenue in 2006) and a leading position in the luxury consumer league tables, making it the number two luxury brand in PPR’s stable.

The story for YSL is a lot less fairytale, and a lot more Nightmare on Elm Street. The brand has not been profitable since Gucci Group purchased it in 1999 and is still reportedly losing around €50m a year. The brand turned over €194m in sales in 2006. PPR doesn’t break out operating loss of YSL its website and has not provided a timeframe to investors for expected profitability.

It’s not surprising then that Stefano Pilati, YSL’s Creative Director, has been trying to inject new energy into this legendary brand. The latest initiative is an innovative project with Nick Knight’s Showstudio. According to WWD, Showstudio has received over 200 submissions of script ideas for a photoshoot to be held this Sunday, featuring the new "seasonless" Edition 24 collection of YSL basics. The creative output of the photoshoot will appear on a newly-revamped YSL website this fall, promoting the new collection in an interactive way, with some user-generated content to boot.

It’s good to see more luxury houses experimenting to see how the web can work for them. While a project like this won’t solve YSL’s systemic profitability problems (Valerie Hermann, YSL’s CEO, clearly still has her work cut out for her), it does bring some freshness to the way the brand is perceived and promotes the new capsule collection in a way that is bound to draw attention (and eyeballs). With a certain "Creative Technologist" on staff, we are looking forward to seeing more interactive experimentation from Gucci Group brands.

Taking on financing is one of the most important decisions an emerging fashion company will make.  This step is absolutely essential because the early stages of growth often requires significant amounts of working capital that cannot be generated by the business alone.  So, unless you are independently wealthy and sitting on a pile of cash, financing decisions will be part of your critical path, early on.

What is the difference between equity and debt?
Financing can come in many forms, but it basically comes down to equity versus debt.

Equity investors (in this case, venture capitalists or angels) provide cash to invest in your company and  therefore end up sharing ownership of the company with you. They invest in the hopes that your business will grow and that they will have some positive return through shared profits and upside.  They may offer you resources and expertise to help drive the business further. In fact, this is much preferred to someone just giving you cash and leaving you to fend for yourself.  If, however, you disagree fundamentally with your investor on where you want to take the company and how you will do it, then you may find their “help” a nuisance. Thus, when evaluating equity investors, choose someone who is aligned with your strategy and who has the industry and/or functional experience that your business needs to grow.

Debt financing, on the other hand, usually comes in the form of loans, where you are required to pay back  the money you have borrowed, plus interest, using a fixed schedule of payments that can be spread out over many years. While debt providers won’t be actively involved in your day to day business, taking on debt will mean you will have an additional cash outflow that your business will have to be able to support each month to stay on good terms with your bank. If payments aren’t made regularly, you may quickly find yourself dealing with irate calls from your bank manager. In the worst case, taking on too much debt  could drive your business into bankruptcy. Debtors are always paid back before profits are shared amonst the shareholders of your company.

The good news is that with your business plan in hand, you are in a good position to share your vision with potential financiers to sift through the various options and make the best decision for your company.  Financiers may have advice to offer, and you should take this under consideration. But, keep in mind the need to stay true to what you originally set out to create. It is important that you believe in the strategy you pursue.

What legal  precautions do you need to take?
Before sharing the nitty-gritty details of your company with anyone, you should request that they sign an NDA, or non-disclosure agreement, which legally restricts the other party from sharing your confidential company information with anyone else. Of course, you can’t control what they actually tell other people, but this is a good way of sending a message that you take your business seriously, and that there is value that needs to be protected. Often, NDA’s are reciprocal, so both parties are protected. Your lawyer will very likely have a template that you can use, with some small adjustments so that it is fit for purpose. It is customary to offer two copies for the other party to sign, so that they can also keep a copy for their files.  Eventually,  you may also need legal advice to ensure your interests are being protected in any subsequent financing arrangement that arises.

What are the equity and debt options available to you?

1) Venture capital – VC funds look for high-potential businesses with strong prospects for growth, often based on a core new technology or brand.

Many VC companies don’t even consider fashion as a core industry for investment, as it is a notoriously fickle place with all sorts of “fashion” risk. However, as the world has been awash investment capital lately and as the competition for traditional investment opportunities has increased, more people seem to seeing a gap in the market for investing in fashion. Initially, the money was targeted at larger investments that have seen the likes of Jil Sander, Helmut Lang, Jimmy Choo and most recently, Valentino, take on private equity. But now, new funds are being raised in London, New York and Paris to focus on earlier stage businesses:

• The Atelier Fund - Richemont has backed the Atelier Fund to invest in early-stage fashion businesses, spearheaded by Dawn Mello, former President of Bergdorf Goodman. The first investments made were in adampluseve, Mathew Mellon, and Mary Norton.

• Towerbrook Partners – Robert Bensoussan, formerly CEO of Jimmy Choo is raising a fund with Towerbrook Partners to invest in fashion businesses with sales of $30m — not quite start-up revenues, but still earlier stage than previously seen in private equity.

• Marvin Traub Associates - Marvin Traub Associates, the New-York based luxury business consultancy, has stated in Women’s Wear Daily that it is toying with the idea of raising investment capital for emerging designer businesses to pair with its business expertise.

• The Centre for Fashion Enterprise - With the support of Harold Tillman, Chairman of Jaeger, The Centre for Fashion Enterprise in London is trying to raise a fund of £5m to invest in early stage fashion businesses. The CFE is a government-funded body that, up until now, only provided small investments of £20-40k.

• Trapezia Capital – In the UK, there is also a venture capital fund called Trapezia Capital that focuses on business started up by women entrepreneurs.

With all of that said, venture capital firms, even the ones that are focusing on early-stage businesses, will often not consider any investment until the business has a proven concept – e.g. sales in excess of $5m, a compelling retail concept, and the potential for multiple product lines, etc.

2) Angel investors - If you’re looking to raise capital for a pure start-up businesses, Angel investors could be your best bet. “Angels” are independently wealthy individuals, often with backgrounds in entrepreneurship and business themselves. While the name might make them seem truly heavenly, angel investors can sometimes be anything but divine and this route needs to pursued with caution. Just finding angel investors (let alone convincing them to invest) can be tough.

The best thing to do is ask friends and family if they know people who might be looking to invest some cash. This will not only help you find angels, it also comes with a built-in personal reference from the person who puts you in touch. There are also networks of angel investors, like Pi Capital, The Go Big Network and The Angel Investor Network, which help to bring angels and entrepreneurs together.

When dealing with angels, it is mportant to ensure that there are clear roles defined before any investment has taken place. It is not rare to see angel investors, with the best of intentions, wreak havoc because they think they are fashion experts and end up interfering in the business. Make sure you agree what they will and will not be involved with based on a clear assessment of their skill set. Make sure you are confident you can jointly make business decisions with them. Test their response to pushback. It is better to know exactly what you are getting in advance, than taking the money and having to struggle later on.

Guy Kawasaki has some great lessons on raising angel capital on his blog, How to Change the World.

3) Banks - Bank loans are possibly the most readily available source of funding for young start-ups. a bank loan usually comes down to:

• the quality (and length) of the relationship you have with your bank and bank manager
• the future prospects for your business
• the debt burden you are already carrying

Essentially, banks want to be confident you will be able to pay them back. While all banks have credit guidelines to assess this, the process is not as scientific as it might seem. A good relationship can go a long way.

Since you won’t have much in the form of collateral to offer the bank in return for your loan, the amount the bank can give you may be relatively small compared to your overall funding need. Therefore, a bank loan strategy may not be sustainable over the longer term as it requires constantly going back to your bank and offers no guarantees that future loans will come through.

Finally, keep in mind that loans also add another cash outflow to your business.  To reflect this in your plans, use your cash flow statement to establish your funding gap for the next 1-2 years, and add in the loan payments that you will have to make each month to  learn how taking on the loan will impact your monthly inflows and outflows of cash.

4) Factors – Factors provide capital to businesses based on the actual  orders they have received on a season by season basis. This is very useful in the fashion business as it can help to finance production for sales orders that have just been completed. Once you hand over your order book to the factors, they will take a cut of the total value themselves, and in return provide you with the cash up fron while they take on the risk of collecting payments later when the goods are delivered. Factors may choose not to underwrite certain stockists which are too small or have bad credit records. One of the leading factors in the US is Hildun. Working with factors means giving away part of your revenues to the factor right from the start.

Where else can you look for more information

For more information on financing your fashion start-up, some general lessons can be learned from the US Small Business Adminstration website and from this case study.

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Next time: How do I decide where to allocate my capital?

Once you have successfully raised your capital, you will need to think carefully about how to allocate this capital across various business needs that you have identified in your plan. You may not have raised all the money you need, so carefully prioritising key areas is important.

This is the third in a series of articles on the Business of Fashion: Basics

• Basics 1 – Setting up your own fashion business – what do I need to know first?
• Basics 2 – What is a business plan for and how do I go about writing it?
• Basics 3 – How do I find the right investors and partners?
• Basics 4 – How do I decide where to allocate my capital?
• Basics 5 – Value Chain – Design and Development
• Basics 6 – Value Chain – Marketing and Sales
• Basics 7 – Value Chain – Production and Supply Chain
• Basics 8 – Value Chain – Retail

This is a really great initiative from the CFDA and other venerable fashion names like Barneys New York and Vogue. That said, I have one suggestion to make it even more powerful. I believe the CFDA should supplement the business mentoring and cash with a requirement and access to funding for the winning designers to find a suitable day-to-day business partner/advisor. While mentoring from an experienced fashion business executive is priceless, it does not make up for daily support and partnership.

I have made this point before, but so many young designers try to do everything on their own, and this means they deal with areas where they might not have any formal training or expertise. One look at the long list of established designers who have relied on business parters to act as thought partners on day-to-day decisions and to share the workload, shows that this is a real pattern of success in the industry.  Marc Jacobs (who has Robert Duffy), Miuccia Prada (has always worked with her husband Patrizio Bertelli), Tom Ford (who with Domenico De Sole turned Gucci around from a fuddy duddy backwater brand), Giorgio Armani (Sergio Galeotti worked with Armani for years before he passed away), Valentino (Giancarlo Gianetti is still his business partner, even if he is no longer his life partner), and Derek Lam  (Jan-Hendrik Schlottmann) have all shown that this tandem approach can help to get the business off the ground properly, allowing the designer to focus more on the creative aspects of the business.

This ad above, from today’s WWD, lays out all of the requirements and the application procedure. Good luck!