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How Will Farfetch Make the Mother of All Fashion-Tech Exits?

With the launch of an ambitious 'operating system' and brand-building guidance from Natalie Massenet, Farfetch is planning to go public. What will it take?
Photo Illustration: Costanza Milano for BoF, Shutterstock
  • Lauren Sherman

LONDON, United Kingdom — Farfetch's headquarters are a minute's walk from the Old Street tube station in the heart of East London, right on the junction dubbed "Silicon Roundabout." Startups are deserting the area because of high rents. And yet, the name remains sticky.

It's a good base for the fashion-tech juggernaut, whose neighbours include Google's "Campus" startup incubator and the headquarters for Young creatives also tend to live nearby, east of central London. But while Gucci loafers may outnumber zip-up hoodies in this office, chief executive José Neves is not running just any fashion company.

Like a good tech CEO, Neves sits among his staff in an open-plan space, his desk in close proximity to a small conference room where he can conduct private meetings. An engineer by trade who started coding when he was eight, he still wears trainers from Swear, the shoe brand he founded in 1996, more than a decade before he launched Farfetch in 2008 and brought the tried-and-true marketplace model to the luxury fashion sector. But as unchanged as Neves appears in disposition, the scale of his ambitions continues to grow.

Farfetch — a fashion e-commerce platform which connects consumers with a curated global network of about 200 independent boutiques and 500 single-brand partners — cleared $800 million in transactions in 2016, up from $500 million in 2015. It generates revenue — an estimated $150 million last year — by taking a commission (averaging between 20 and 25 percent, according to retail partners) on those transactions. According to data from web analytics firm Alexa, Farfetch is now the world’s top online luxury shopping destination measured by traffic, outstripping competitors like Net-a Porter and Neiman Marcus.

With an average order value of $700, a roughly 50-50 split between female and male customers and a global footprint — according to Cowen & Co., about 35 percent of its business comes from Europe, 30 percent from the US, 17 percent from APAC, 10 percent from China and 8 percent from the rest of the world — Farfetch's core marketplace product "delivered significant underlying profitability" in the fourth quarter of the 2016 fiscal year, according to Neves, with the value of traded merchandise up 75 percent during the same period.

But Farfetch has raised more than $350 million in venture funding, including a $110 million Series F round that valued the company, according to market reports, at around $1.5 billion. As this rare fashion "unicorn" looks ahead to an eventual exit, potential buyers include Amazon — once rumoured to be eying Net-a-Porter and still eager to crack high fashion — or a private equity firm. But the outcome most likely to please investors is a public flotation.

In multiple interviews, Neves has made it clear that an initial public offering is the logical next financial milestone for the company, though he has been reluctant to lay out a specific timetable. An IPO would also enable Farfetch to build a war chest big enough to do long-term battle with the likes of the Yoox Net-a-Porter Group, which generated about $2 billion in net sales in 2016, with organic growth up 18 percent year-over-year. LVMH, the world's largest luxury conglomerate, is now not only a partner — many of the group's 70+ brands are sold on Farfetch — but a direct competitor with the coming launch of its own multi-brand e-commerce site, 24 Sèvres.

But Neves seems far more obsessed with the tech-enabled platform businesses built by Airbnb and Uber than traditional luxury retailers. Critically, he sees Farfetch as a company that understands both the power of technology and the power of a well-cut dress. "It's a curated platform. It's not like most technology platforms like eBay or Dropbox, which are all about growing in scale," Neves told BoF back in 2015. "Yes, we're about growing, but it's never compromising the level of curation. It's about a certain taste and a certain wavelength of brands. I think this is really important." Neves has called the company's unique blend of fashion and technology "the secret sauce of the business."

Farfetch is continually improving the customer value proposition and positively impacting brands and merchants.

But for Farfetch to be successful, its retail partners must be successful. And beyond simply recruiting new stores and brands to the platform, Farfetch has made significant efforts to boost the fortunes and ease the frictions of traditional retail — uneven inventory buys, uninspired customer experience — through new technology. “We started launching more omnichannel propositions, same-day delivery in 10 cities… ‘click and collect’ in store and return in store,” he said in a recent interview. “All of this is very much part of the DNA of Farfetch.”

More recently, Farfetch partnered with Gucci to offer 90-minute delivery in 10 cities across the globe. “While it involves only one iconic fashion brand at the moment and a limited number of items, it’s clear that management is continually improving the customer value proposition and positively impacting brands and merchants,” Cowen & Co. analyst John Blackledge said in a recent note.

Then there's Store of the Future, an "operating system" for physical retail that aims to dramatically improve productivity by capturing customer data and enhancing human interactions between shoppers and sales associates. Store of the Future will launch as a pilot program with Thom Browne and London specialty store Browns later this year, but the commercial model has yet to be defined. (Farfetch owns Browns, which it acquired in 2015 and has described it as a sort of petri dish for omnichannel experimentation.) "It's just the next step," Neves said of the project. "How do we go completely, completely into the store? Not just having full visibility of the inventory, and using the physical store as a service point. But how do we go into what we call augmented retail?"

Whether or not all this innovation will actually move the needle remains to be seen. “If this was 2006 or 2007, pre-Amazon eating everybody’s lunch, then maybe,” said Kashif Sheikh, an investment analyst at the research firm Privco. “[Farfetch's marketplace business] is a high-margin model, and you don’t have the risk of dealing with supply issues. But now it’s different…. This is the Amazon age of e-commerce. The Echo Look may render all of this other technology obsolete.”

What’s more, there are still bugs in Farfetch’s model. Consider inventory control. The kind of single-store retailers that make up a large portion of Farfetch’s network often buy only a few units of a specific style. So while there are more than 60,000 pieces of women's clothing on the site right now, coveted items can be scarce. Farfetch regularly feeds back data to its partners, but ultimately has little direct control over what product is actually sold on its platform.

Uneven pricing from boutique to boutique, and country to country, also poses a challenge. For savvy shoppers, one of the most satisfying elements of Farfetch is comparison shopping within the site. (A US-based customer, for instance, can get a deal on a product shipping from Europe thanks to the weak euro.) But brands don’t like this, especially those who also operate their own stores on the platform.

In order to scale further and to attract more repeat customers, Farfetch would benefit from its own “Netflix and chill” moment. Like Google, Facebook, Uber and Airbnb, it needs to be indicative of a very specific activity.

“We’re very proud of what we stand for, and we definitely want to develop an emotional relationship between the brand and the customer beyond being a great service provider,” said Neves. “Research shows that the customers who get in touch with the brand are incredibly loyal to Farfetch after the second or third purchase. People that have tried the service, they love it, and they talk to their friends and family.”

We don't have any timing, but [an IPO] is the next financial milestone for the business, that's for sure.

What that service stands for will be clarified, in part, by the arrival of Natalie Massenet, who joined Farfetch as non-executive co-chairman in February. The Net-a-Porter founder's track record as a brand-builder in luxury e-commerce is unmatched. But developing a brand takes a lot of time and money, and Farfetch's fundraising days are likely over.

Sheikh pointed to the participation of Singapore’s sovereign wealth fund Temasek in Farfetch’s Series F round as an indication that its fundraising well was drying up, drawing a comparison to Uber's decision to seek funding from Saudi Arabia's Public Investment Fund. “It means you’ve already run out of runway for traditional investors.”

However, when Farfetch closed its $110 million Series F round in May 2016 — just 14 months after announcing an $86 million Series E round — Neves told BoF that the Temasek investment would help fuel growth in Asia. "If you look at the partners we now welcome on board, like Temasek, which has a huge, huge influence in South-East Asia and investments in all the major Asian internet players, and IDG Capital Partners — same thing — it's definitely a strategic move," he said. "They know all the players there and it makes things easier for partnerships, for hiring, for insights."

If Farfetch does complete a successful initial public offering at a valuation that is significantly above $1.5 billion, it could change the lives of the company’s founders and senior management, making them millionaires many times over along the way. Neves’ personal net worth will likely become the subject of headlines. (The exact percentage of the company that Neves still owns is unknown, but he is thought to have a significant minority stake worth tens of millions of dollars on exit.)

Early-stage investors, including Advent and Condé Nast, stand to do very well from a successful IPO. The wider Farfetch team will also likely benefit, following the company's introduction of an initiative called Farfetch For All, by which all employees are offered share options.

As a point of comparison, Snap’s founders were made billionaires when the company went public in March 2017. On the first day of trading, it was valued at $33 billion. Early backers Lightspeed Venture Partners’ stake was worth roughly $2 billion alone. But just as Snap’s shares plummeted soon after its first earnings call revealed a slow in user growth and revenue — indicating a longer path to profitability than some had expected — a post-IPO Farfetch will be held accountable from quarter to quarter and investors will only see a return if the company manages to raise a significant sum when it goes public. And, of course, until the flotation occurs, Fareftch’s giant valuation exists only on paper.

Yet if the flotation is successful, Farfetch could inspire new confidence in fashion investments in venture capital circles. It could also prompt other fashion-tech firms to go public. San Francisco-based Stitchfix is already said to be considering an IPO. Spring, a marketplace competitor to Farfetch that bills itself as a modern mall, recently raised another $65 million to bring its total funding to more than $100 million.

People familiar with the company’s plans say that Farfetch is aiming to IPO in 2018. But Neves insists that he is not in a rush. “We don’t have any timing,” he said. “But it is the next financial milestone for the business, that’s for sure. It’s the best way for a business to get liquidity for their investors because at the end of the day if you have investors you need to find the liquidity for them, and keep the fantastic team we have.”

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