NEW YORK, United States — In January, as the first cases of Covid-19 were detected outside China, fashion’s start-up scene was pretty much carrying on as normal: among the companies nabbing investments were luxury multi-brand e-tailer Moda Operandi, footwear espadrille seller Sea Star Beachwear and a host of new beauty brands.

The venture capital market pretty much shut down along with the rest of the global economy soon after. The companies that have managed to raise money since then point to a starkly different reality.

Resale platforms have had no trouble tapping investors, with Vestiaire Collective raising €59 million at the height of the lockdown in April and Rebag raising $15 million in May. Then there's Otrium, an Amsterdam-based company that promises to help brands sell excess inventory, which raised $26.4 million in May.

What many of the start-ups raising money these days have in common: they are seen by investors as recession-proof. Some, including Otrium, could even thrive as fashion reels from store closures and weak consumer spending. It's a 180-degree shift from the mentality in Silicon Valley before the pandemic, when growth was often prioritised at the expense of profitability.

“The ability to thrive in this new environment is important to me as an investor,” said Davor Hebel, a managing partner at Eight Roads Ventures, which led Otrium’s latest round of funding. “We’re looking at companies that will sail through the macro-tail winds of [global crises].”

Otrium, which lets brands like Scotch & Soda, Reiss, Esprit and Guess sell off their end-of-season product on its platform, fits Hebel’s criteria. Many start-ups, particularly new clothing and beauty brands, do not.

As an investor I've got to quickly pivot to profitability.

Multiple founders have told BoF their fundraising plans were put on pause while investors assess the new normal. The global pandemic has exacerbated investor's hesitance in investing in consumer brands, since consumer spending is on the decline. Investors are now looking at brands that have a proven track record for organically building audiences, and are creating products that are unique and not just another direct-to-consumer copycat.

“There was room to support companies pursuing the hyper-growth strategy because capital was freely available, but now that the market has retracted, as an investor, I’ve got to quickly pivot to profitability,” said Daniel Gulati, founding partner at Forecast Fund, which has invested in companies like Away and Italic. “The music has stopped.”

What Investors Want

Investors are interested in companies that are spotting consumer trends coming out of Covid-19. This doesn't mean start-ups have to produce PPE.

“We aren’t looking at companies that are trying to solve the short-term Covid problems,” said Caitlin Strandberg, a principal at Venture Capital firm Lerer Hippeau, which has invested in startups like Allbirds, Casper, Everlane and Glossier. “There’s going to be major disruptions in retail, so who is thinking of the next steps beyond that?”

Pointing out that Covid-19 showed flaws in both retail and e-commerce, Strandberg said Lerer Hippeau is “interested in companies that are thinking of robust ways to build omnichannel,” so that a startup’s business plan isn’t leaning too heavily on any single distribution method.

Gulati is looking for companies that can capitalise on digital retail opportunities. Video is one promising avenue, as people who have grown used to video chat at work may be willing to give it a try when they shop, he said.

Meera Clark, an investor at Obvious Ventures, said she is interested in products that promote sustainability.

We believe there's going to be a 'less is more' attitude with consumption, since people went so long without buying anything during Covid.

“We believe there’s going to be a ‘less is more’ attitude with consumption, since people went so long without buying anything during Covid,” she said. “That will mean luxury that focuses on quality and impact, and has refillable, reusable packaging.”

And while it's going to be harder to make the case for investing in fashion brands, some investors are willing to take bets on the right category. Richard Klin, a London real estate entrepreneur who's invested in coffee startups and virtual reality, recently invested in Marfa Stance, a new fashion brand started by Burberry and Rag & Bone alumnus Georgia Dant, which sells luxury reversible outerwear.

“I am always looking to invest in something that solves a problem, and Marfa Stance is unique, functional, and doesn’t just look pretty,” Klin said.

Gail Zauder, managing partner of strategic advisory firm Elixir Advisors, said investors are also now interested in brands that are debuting something unique, rather than trying to be the next Glossier.

“There are too many of the same beauty brands and they can’t all be successful,” Zauder said. “I think this will be an Ice Age, where only the people that deserve to survive will get funding.”

Some analysts believe luxury fashion will rebound faster after the coronavirus aftermath. But others see an affordable price point as the key to success in a recession. Among the few retailers to see sales rise during the pandemic are big-box chains like Walmart and Target, which specialise in low-cost goods.

“You need to think about what will drive sales and that’s lower, non-premium price points,” said Anna Whiteman, an investor at Coefficient Capital.

What Investors Don’t Want

No surprise: with Neiman Marcus and J.C. Penney in bankruptcy and other multi-brand retailers struggling, wholesale-dependent brands are ice-cold with investors.

"The entire channel is so questionable and investors don't want to be at the whims of wholesale," said Ron Frasch, a former operating partner at private equity firm Castanea. "Brands need to be pushing more into direct-to-consumer directly."

The entire channel is so questionable and investors don't want to be at the whims of wholesale.

Klin added that there are plenty of private entrepreneurs who are interested in investing in fashion, so long as they aren’t heavily reliant on retail.

“If someone in fashion with 30 stores came to me, I wouldn’t be interested,” Klin said. “But if a brand has a clear story, solves a problem, and is going digital, I see a market for it.”

Investors say they are also avoiding companies that need to pour millions of dollars into Instagram ads to grow. Convincing customers to come back again and again is preferable.

“In the past, it was a tried-and-true playbook, but now spending a lot is a red flag,” said Strandberg. “Brands need to be finding organic ways to grow their audience to prove they can scale.”

In a down economy, founders also need to be further along in product development.

“In the past, founders were given more grace to find product-market fit, but the stakes are higher so now the ones with data, not the ones who want to do discovery, will get funding,” said Strandberg.

One of the most compelling features right now is a company that can effectively do a lot with very little money.

And just like their customers, start-ups need to be frugal.

“We are wary of companies that are burning money without a clear articulation of why,” said Hebel. “One of the most compelling features right now is a company that can effectively do a lot with very little money.”

Private Money vs VC

Start-ups that are eager to raise money might automatically look to venture capital. But Dant, the founder of the fashion brand Marfa Stance, said there are perks to going through private investors like Klin.

“I went for private money at this stage because I want majority creative and financial control,” Dant said. “If you get a huge injection of cash and give majority stake in a company, you can't maintain purity of vision.”

If you get a huge injection of cash and give majority stake in a company, you can't maintain purity of vision.

Of course, access is everything; many founders can tap funding networks because of their class, ethnicity and money.

Strandberg said venture capital investment is still open to fashion brands that have a proven track record with customers, even if they’re burning through cash. But founders should be aware that if they are turning to investors out of desperation, they’ll likely have to cede more ownership of their brand. Valuations are going to be lower too.

“The riskier the company is, the more ownership we are going to purchase to compensate us for the risk,” Strandberg said. “It used to be a founder’s game, but now it’s definitely an investor’s game.”