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Why Venture Capital Is a Bad Fit for (Most) Fashion Businesses

For every Reformation, there are a dozen Outdoor Voices. Most apparel companies will have better luck looking beyond Silicon Valley for funding.
Illustration by BoF.
Illustration by BoF.

In the past decade, the venture capital community got hip to fashion. Early in the direct-to-consumer brand boom, companies like Everlane, Reformation and Outdoor Voices, all backed by “VC,” became shining examples of disruptive, next-generation apparel brands that used digital channels alongside more traditional levers — clever marketing, good design, smart merchandising — to connect with customers. Their early success inspired venture investors, who had largely steered clear of trendy consumer products, to make more bets on fashion.

From that early crop of venture-backed fashion start-ups, Everlane and Reformation have grown to the next level, with Everlane raising $85 million from private equity firm L Catterton in 2020, and Reformation selling a majority stake to Permira a year earlier in deals that set them up to scale further.

But for every Reformation and Everlane, there are dozens of Outdoor Voices: fashion companies that were once VC darlings but struggled to keep pace with the expectations of venture investors, who pour money into promising start-ups with the hopes of fueling rapid growth and hitting it big with a small number of spectacular exits.

Venture investors know success is rare and place their bets accordingly. But apparel brands have proven to be a difficult fit for their approach. Outdoor Voices, which in 2019 was generating just $40 million in sales and losing up to $2 million a month after raising more than $60 million, has become a cautionary tale for VCs considering investments in the category. (It’s now in the midst of an attempted turnaround — led by a new investor and chief executive.) Bonobos, a men’s line that launched in 2007, touting itself as a better way to buy pants, sold to Walmart in 2017 for $310 million after having difficulty raising more money a year earlier at a higher valuation.

“We thought we had solved the problem,” said Ari Bloom, an investor and entrepreneur. “But in reality, fashion is not really compelling for an institutional investor.”

The Wrong Kind of Risky

When it comes down to it, the current model for building an apparel business rarely delivers the results venture investors are looking for, which can be a hard thing for young labels to hear.

“Apparel and fashion tend to be some of the hardest categories to make a lot of money in,” said Nick Brown, co-founder of Imaginary Ventures and a longtime investor in apparel who took early stakes in Reformation, Everlane and Outdoor Voices. “The newness cadence around fashion forces the need to discount product, making your gross margin a bit more challenging.”

Unlike many other consumer categories, apparel brands can — and often do — launch hundreds of new products each year, which means the companies are constantly taking bets on whether or not a style will hit. If it doesn’t, that inventory needs to be discounted to a point where the company often loses money on it. Because new trends are difficult to predict with old data, supply and demand is often misaligned.

In product categories like beauty and food, the retention rate also tends to be higher because it’s something that the consumer replenishes on a regular basis if they like it. Even with a basic piece, like a T-shirt, the replenishment pattern can vary wildly.

“With fashion, there’s less loyalty,” said Jared Stein, a founder at Monogram Capital, whose investments include DS & Durga, Chewy.com and Olipop soda. “The replacement cycle — how often you’re going to buy — is unknown.”

It can also take fashion 20 years to achieve the kind of growth venture capitalists expect in half a decade if they want to develop and maintain strong brand equity. Cultural value takes time to build, and maintaining a certain coolness becomes more difficult as a label is known to more people. A beauty brand can launch one year, be in Sephora the next, and reach $50 or $100 million in sales soon after. Supreme, on the other hand, was founded in 1994 and wasn’t sold to VF Corp until 2020, 26 years later.

“Fashion is tough,” Brown added. “The truth is, there haven’t been that many companies that have been big enough to go public, not a ton of big $50 million businesses with 10 percent-plus EBITDA.”

Lack of Genuine Innovation

VCs also do well with investments that are truly disruptive: innovations that could change the way the entire industry works, in the same vein that the first generation of direct-to-consumer brands forced all fashion businesses to pay more attention to the online channel.

From inventory management to distribution to underserved customers, there are plenty of opportunities for change. But few apparel startups have managed to disrupt the market.

“From the venture capital perspective, if you think about the fundamental goal, what most of us are going after, is a new dynamic in a category,” said Kirsten Green, founder of Forerunner Ventures, the San Francisco-based venture capital firm that began making investments in product companies — including Stadium Goods, Bonobos, Reformation and Outdoor Voices — early on, becoming a proof point for her competitors to dive into the market. “There must be a reason to believe that there is a need in the market that’s not already filled,” she added.

More than product companies, Green is increasingly focused on services or platforms like digital showroom Joor and online marketplace The Yes. Meanwhile, Brown has targeted brands in categories he believes are in clear need of disruption, such as shapewear label SKIMS, recently valued at $1.6 billion, or Universal Standard, a minimalist label that sells clothes in sizes 0 to 40 that wants to not only to appeal to the underserved larger-sized customer but to normalise broader size runs across the industry.

Alternative Sources of Funding

Most apparel brands aiming to scale should look beyond venture capital.

“Great design is not defensible,” Bloom added. “The best thing you can do is build a profitable business that you can scale through reinvesting your own profit or using some debt. Stop using fundraising as a badge of honour.”

“Brand shouldn’t be discouraged if venture capital is not right for them,” Green added. “There is so much conversation about venture that people forget what that is … We think about scale at billion-dollar plus-plus-plus.”

Other types of investors — an independent backer or a family office with more patience and less ambitious growth expectations — are often a better bet for an apparel label that has big goals, but has yet to forge a path to that billion-dollar valuation.

“Having a patient enough capital structure is great earlier on,” Stein said. “In that regard, it’s kind of like the restaurant industry — the best capital you can take in is someone who is just a fan.”

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