NEW YORK, United States — Since founding denim and basics brand DSTLD in 2013, Mark Lynn and Corey Epstein have raised $4.3 million the old-fashioned way, turning to venture capitalists including CAA Ventures and Wavemaker Partners.
In the past year, DSTLD’s sales have increased by 640 percent to more than 34,000 units. But to help fuel further growth, Lynn and Epstein needed to raise more capital. (As a direct-to-consumer label, customer acquisition is a critical — and expensive — component of the business.) However, instead of turning once again to venture capital firms, the co-founders decided to launch a campaign on equity crowdfunding platform SeedInvest, which allows companies to raise money from Internet users.
For years, US regulations forbid non-accredited investors — those with a net worth of less than $1 million and who earned less than $200,000 annually in the last two years — from making equity investments in early stage companies, which are inherently risky, on the grounds of investor protection. (On popular crowdfunding sites like Kickstarter, people who contribute funds are rewarded with giveaways like t-shirts, but do not acquire equity in the companies they support.) But in June 2015, in response to criticism that ordinary investors were being locked out of the start-up boom, the US Securities and Exchange Commission (SEC) implemented Title IV of the JOBS Act, which, among other things, now allows non-accredited individuals to invest in early stage companies.
Lynn and Epstein posted their pitch on SeedInvest in September 2015 and, so far, DSTLD has received more than $9.4 million worth of “indicated interest” from individual investors. Whether or not that interest turns into actual cash remains to be seen: not only do these would-be investors still need to make real commitments, but DSTLD still needs to determine just how much equity investors will receive. Nonetheless, Lynn is taken with the idea. “It’s an opportunity to turn the capital formation structure on its head,” he says. “It allows your best customers to participate in the brand story in a really profound way. They can be evangelisers of the product.”
It’s a powerful concept — but one that has rarely worked in practice for fashion labels aiming to crowdfund their growth. Indeed, while companies are projected to raise $34.4 billion in crowdfunded investments in 2015, according to research and advisory firm Massolution, just a sliver of those using crowdfunding operate in the apparel sector. Of the 93,546 projects successfully funded on Kickstarter since the platform launched, only 3,163 (or 3 percent) have been fashion-related. And while the success rate of technology-related campaigns (20 percent) is actually lower than that of fashion-related campaigns (24 percent), technology projects have successfully raised a total of $297 million, significantly more than the $59 million raised by fashion projects.
But for many proponents of the approach, Title IV of the JOBS Act — and, more recently, Title III of the same regulation, passed by the SEC on October 30, which makes it even easier for early stage startups to raise money from non-accredited investors — have changed the prospects for crowdfunding in fashion.
To be sure, not everyone is pleased with the new rules. Companies wishing to raise under $20 million will have to submit to review by US state governments and SeedInvest, for one, is concerned that these authorities will charge exorbitant fees and bottleneck the process. But the new rules, which are set to go into effect on January 29, 2016, have undoubtedly created new momentum for both crowdfunding platforms and individual companies aiming to crowdfund their expansion.
Fashion Fund, a Seattle-based crowdfunding platform, plans to launch on January 29, as soon as the new rules take effect. “In fashion, a designer may just need that ugly $500,000 or $800,000 to get off the ground,” says Fashion Fund founder and managing director Kartik Ram. The company will launch with brands including Glamster, which specialises in sleek bike wear, Triangl swimwear and Hare+Hart handbags. “Americans have a mindset to take risks,” Ram says. “There is such a propensity for hipster and artisan brands. Crowdfunding allows customers to become investors.”
Whether or not customers want to become investors, however, remains to be seen. Over the years, several companies have aimed to build go-to platforms for crowdfunded fashion, including Catwalk Genius (founded in 2007), FashionStake (2010), Cut on Your Bias (2012) and ZaoZao (2012). Each platform had a slightly different approach. London-based Catwalk Genius helped designers raise funds to finance new collections. Revenues from resulting sales were split equally between the “supporters,” the designer and the platform. In its first iteration, New York-based Fashion Stake rewarded supporters by offering clothing credits in what essentially amounted to pre-order. Cut On Your Bias, also based in New York, used a similar model, but asked supporters to vote on specific designs. Hong Kong-based ZaoZao took a similar approach, but focused on Asian designers.
But each of these firms has since shuttered or been absorbed by another company. Fab.com acquired FashionStake in 2012, although by that time the company had already pivoted its business model away from crowdfunding to traditional e-commerce. ZaoZao also pivoted to traditional e-commerce before closing. And, despite early buzz, neither Catwalk Genius nor Cut On Your Bias ever really took off. What went wrong?
“The problem we were solving was that there was this growing group of independent designers — some professional and some not — that lacked a way to market their creations and grow their businesses. Initially, we focused on the second part of the problem by providing financing and customer feedback to designers pre-production, enabling them to make better bets on inventory,” explains FashionStake co-founder Daniel Gulati. “While this was a valid pain point, the more interesting business was around the first part: providing a distribution channel for designers to sell existing inventory. We noticed that within the first few months of launching and shifted the business quickly to capitalise.”
“Many of the people who came to our site didn’t quite know what crowdfunding was and a lot of our marketing efforts were spent explaining it to them,” says ZaoZao co-founder Vicky Wu. “We soon realised that we were never going to achieve the scale of a first mover like Kickstarter and that we were just adding more noise to the market.”
As for Cut On Your Bias, featuring designers who were known in the fashion industry but not to a broader audience — such as Timo Weiland or Suzanne Rae — was a significant barrier. “It was super difficult to gain customer trust,” says Louis Monoyudis, the company’s founder.
Often, the emerging designers crowdfunding their businesses are highly inexperienced. “When we review a project, the first thing we do is make sure that the designer has the ability to complete it,” says Lucas Vigliocco, co-founder of London-based fashion crowdfunding platform Wowcracy. “Many of the designers are not yet professionals, so we need to make sure that the person is committed to the project and our process.” While more than 1,250 designers have submitted projects to Wowcracy since it was founded in 2013, only 250 have actually been published by the site.
Many designers remain unprepared to produce what they’ve promised. “One thing that catches a lot of people off guard is how many unique items they’re going to have to build,” says Maxwell Salzberg, who runs BackerKit, a company making fulfillment software geared towards crowdfunded start-ups. “Even if you’re making a belt in three different colors with three different buckles and three different sizes to choose from, that’s [a lot] of SKUs.”
What’s more, the skill level and manufacturing know-how of young designers can vary wildly, making it difficult for many to deliver well-made garments at a competitive price point. “Even making a pattern is an investment,” says Cecilia Pagkalinawan, who advises fashion start-ups. (Pagkalinawan also founded crowdsourced-fashion platform StyleTrek in 2010. It closed two years later.)
Returns, too, can be an albatross. Because most of the designers featured on crowfdfunding sites are new, it’s difficult for consumers to gauge accurate sizing, which can result in a high return rate. “Big fashion companies can afford to have free returns,” Salzberg says. “If you’re an independent brand, that can be a pretty big ding in your budget.”
Yet there are fashion crowdfunding success stories, from Ministry of Supply, which raised $430,000 for its sweat-wicking Apollo dress shirt on Kickstarter in 2012, to BauBax, the travel jacket that has attracted more than $10 million on Indiegogo. Consider the case of Victor Athletics, the Cincinnati-based company that raised more than $100,000 on Kickstarter to produce its Tennessee-made tees and sweatshirts. The proprietors already owned the upscale line Noble Denim — sold at stores such as Japan’s Journal Standard — and were able to raise awareness through its network of followers. They also already had great relationships with manufacturers. Finally, “We did research around what price points were attractive to people and we chose the direct-to-consumer model so that we could keep the prices a bit lower,” explains co-founder Abby Sutton. Victor Athletics’ first round of sweatshirts are being shipped in early October and the company has plans to open its first physical store in Cincinnati later on this year.
Gulati believes that these wins for fashion crowdfunding indicate that independent platforms such as Fashion Fund and Wowocracy could indeed succeed. “Although no one has built an independently huge business in the space, I think Kickstarter and others have shown that there is growing acceptance of the model,” he says. “Aside from the consumer behaviour trends, the other development is regulatory, where you see equity-based crowdfunding legislation really starting to take shape and in many regions, this legislation has been enacted,” Gulati continues. “If new startups are able to facilitate revenue share or equity deals between designers and their backers in a way that previously wasn’t allowed, there’s real breakout potential there.”
To be sure, venture capitalists themselves are not entirely turned off by the idea of fashion crowdfunding platforms. “I’m hoping that the advantages — zero waste, demand that comes before the supply, price control — will outweigh the slight negatives,” says Billy Draper of California-based seed-stage venture capital firm Draper Associates, which has invested in several specialised crowdfunding platforms including Indiegogo and UsTrendy. “When you pick one industry as your focal point, you learn a lot more about that industry.”
However, some of those who have been through it still aren’t convinced that selling fashion through crowdfunding will ever work. “The whole premise is based on putting the ball in the customer’s court. I hate to admit it, but fashion really is dictated by the influencers,” Wu says. “Most people are followers.”