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Fashion's Top VCs Open Their Playbooks

A new breed of VC firms is backing next-generation digital lifestyle brands targeting millennials. BoF talks to five of the top players to decode their investment theses.
Outdoor Voices, Reformation, Warby Parker, Hims, Everlane and Glossier campaigns | Source: Courtesy
  • Victoria Berezhna

NEW YORK, United States  When Everlane opened its first store in New York, customers lined up to snag some of the label's signature cashmere sweaters and basic T-shirts. Behind the scenes, at this and other trendy digital brands, investors are also queuing up for a piece of the action.

Venture-capital firms are snapping up stakes in digitally native fashion and beauty start-ups, pouring tens of millions of dollars into brands they hope will grow into the next Reformation or Glossier.

Part of the appeal of these start-ups is that they’re growing at a time when many brick-and-mortar retailers are not. By selling directly to consumers, they can make fatter profit margins than wholesale-dependent labels and generate reams of valuable customer data. They also tend to have deeply loyal followings among young shoppers: so-called communities developed through careful branding, events and a strong social media game.

The challenge for VC firms is to sort the brands with effective approaches to wooing millennials from the pretenders; anyone can sponsor a running club, but there’s only one Outdoor Voices (total amount raised: $57 million). That requires a different skill set for many investors, who must analyse fashion and beauty start-ups on both financially and creatively before pulling the trigger on a deal.

"Ten years ago, the average investor looked at these companies and thought of them as tech companies that were selling product," said Nick Brown, partner at Imaginary Ventures, which launched in 2017 and closed a $75 million round in early 2018. "Now, the world thinks of them as product companies that start their journey online in direct to consumer."

Imaginary Ventures is among the newest in a crop of VC firms specialising in digital lifestyle to spring up over the last decade. Others include Forerunner Ventures, Thrive Capital, Stripes Group and Felix Capital.

Here’s how each finds the stand-outs in an increasingly crowded start-up field:

Forerunner Ventures
Founded in 2010
Strategy: Invest in companies using technology to take advantage of dislocations in retail.

Kirsten Green’s retail and commerce-focused venture capital firm has placed bets on a throng of upstarts from Warby Parker and Glossier to Away and Stadium Goods. Some of her most successful exits have been (acquired by Walmart for $3.3 billion) and Dollar Shave Club (acquired by Unilever for $1 billion).

For Green, part of what makes start-ups attractive is “you can start to learn while you’re selling product [because] as a business we have many more points of data and points of engagement.”

Forerunner is also an investor in companies with a sense of social purpose, such as 11 Honoré, which offers designer plus-size clothing, sustainable fashion brand Reformation and men’s wellness brand Hims, as well as female-led companies including ShopShops, Birdies and Outdoor Voices.

“The business is getting complex, leading [VC] firms down the path of specialisation,” said Green. “[The landscape] requires you being more knowledgeable and have a forward-looking approach.”

Felix Capital
Founded in 2014
Strategy: Invest in digital media and lifestyle businesses that have built strong communities.

The London-based venture capital firm is positioned at the intersection of technology, business and creativity. Partner Frederic Court was the first investor in Farfetch in 2010, which is reportedly aiming to go public later this year, and was the lead investor for Goop and Highsnobiety after founding Felix Capital. Its non-fashion portfolio features delivery service Deliveroo and online stationery store Papier.

Finding the right fashion investments "requires a different skillset to understand these brands… which hasn't been developed in the more traditional VC firms," said Stephanie Phair, chief strategy officer at Farfetch and advisor at Felix Capital.

Goop and Highsnobiety were appealing because they had such vibrant niche communities, which helps them achieve scale. At Goop, for instance, adding a blog, products and events allowed more people to engage with the brand.

“What we look for is a brand that has a digital lifestyle proposition that’s very distinctive and has a strong community aspect,” said Court, who was previously general partner at tech and science VC firm Advent. “You can grow a business without scaling a community in crazy ways, just by adding different pillars.”

Stripes Group
Founded in 2007
Strategy: Invest in digital businesses and consumer product businesses targeting millennials.

The boutique growth equity firm makes $10 million to $150 million investments in internet, software and branded consumer businesses. The firm's portfolio includes digital media company Refinery29, Swiss performance sneaker brand On Running and tuxedo rental site The Black Tux, as well as Reformation.

The focus within product businesses, partner Ken Fox said, is driven by millennial values and the way this category of shoppers interacts with brands. He has an eye on beauty, wellness and food start-ups that align themselves with millennial values.

“All those segments are compelling because there are opportunities to deliver a level of taste and fashion that’s also aligned with values — how things are sourced and what things are made out of,” he said.

Thrive Capital
Founded in 2009
Strategy: Invest in technology and software firms that provide lifestyle services to millennials.

The venture capital firm founded by Joshua Kushner with a mandate for internet and software investments has been making inroads into consumer brands. A number of multi-million-dollar investments into men’s wellness brand Hims, streetwear resale site Grailed, children’s clothing brand Maisonette and Glossier have resulted in a burgeoning digital lifestyle portfolio. In 2016 the firm raised over $700 million in a funding round, allowing it to invest in top-tier start-ups like, Spotify, Warby Parker and Harry’s.

Imaginary Ventures
Founded in 2017
Strategy: Invest in direct-to-consumer digital-first brands geared towards millennials that are disrupting retail and building loyal communities.

Founded by Net-a-Porter's Natalie Massenet and Brown, formerly a partner at investment firm 14W, Imaginary closed a $75 million funding round in 2018 to "invest in entrepreneurs that are being disruptive with retail," said Brown. With investments ranging from companies like Glossier in the beauty space; Everlane, Reformation, Good American and Universal Standard in apparel; and pharmaceutical-grade company Keeps, the portfolio focuses on digital-first brands geared towards millennials.

“Our playbook has always been focused on businesses that have built a community, a sense of loyalty and a sense of trust with the consumer,” said Brown. “Most of what we do are product-focused companies that are largely direct-to-consumer in nature.”

Brown and Massenet look for founders with a distinctive point of view and product differentiation, and brands that are able to translate into other markets, whether international expansion or new categories. "The businesses that will endure in this new landscape will be those obsessed with the consumer," said Massenet. "[They] build their strategy around an understanding of their consumers’ identities and lifestyles and... never lose sight of them as they grow."

Disclosure: Felix Capital is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholders’ documentation guaranteeing BoF’s complete editorial independence.

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