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Op-Ed | The End of the $1 Billion Fashion Brand

Armed with huge sums of money invested at sky-high valuations, fashion start-ups are setting themselves up for failure. But with the right capital structure, any company that can build a brand that delights its customers can be an economic win for all involved, argues Lawrence Lenihan.
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  • Lawrence Lenihan

NEW YORK, United States — There will never be another start-up fashion brand that will reach $1 billion in revenue. In fact, it is very possible that there will not be a fashion brand that was started in the past five years that will generate that amount of revenue. All of the money invested in fashion start-ups to maintain their early growth rates will not drive the returns venture capitalists had hoped for when they invested huge sums of money at sky-high valuations. Much of this capital will be lost, leaving in its wake a general malaise and depression that will affect the fashion start-up ecosystem for years to come. But, ironically, this impending reality will also mark the beginning of the most incredible time in the history of fashion for entrepreneurs to build great brands.

What Makes a Brand?

A brand is a connection between a business and its customer. My favourite definition of a brand is the first image that pops into someone’s mind when their eyes are closed and they hear your company’s name. In reality, your brand is your business, because your business is your relationship with your customer and the sale of your product is merely confirmation of that relationship.

Over the past few decades, as the global market for fashion has reached hundreds of billions of dollars in size, specialty brands and retailers that are more attuned to specific consumer interests, values and aspirations have flourished in each of the industry’s many segments, forging increasingly strong bonds with their customers.


Notwithstanding the transparent-yoga-pants tempest in a teapot and the company’s self-inflicted investor and customer relations fiascos, Vancouver-based Lululemon remains one of the best fashion and apparel brands built in recent years. Since its founding in 1998, it has succeeded through great specificity in market focus, deeply connecting and becoming intertwined with the lifestyles and activities of its customers. Wearing Lululemon speaks volumes about who you are as a woman: active, engaged, physical, spiritual and connected to your environment; the personification of the Yoga practice. And by creating this connection with its customers, Lululemon has grown into a $1.6 billion company that has created $9 billion in shareholder value.

But five years after its founding, Lululemon was only a $5 million annual revenue business. What a failure in comparison to the famous Internet brands that you read about every day! But in those five years, they refined their brand and their message to customers; they learned and perfected the brand experience, they hired people who grew as the business grew, forming the basis of an organisational infrastructure; they learned how to make stuff well and did all the other things that every successful company needs to master if it hopes to become great. In its sixth year, Lululemon tripled in size and never looked back. As it spread across North America, customers first heard about it, then yearned for it. And if you were smart enough to recognise that this was a budding juggernaut and wanted to compete head-to-head, you needed a lot of capital and physical stores — and you had to face a five-year learning curve.

The Internet Changes Everything

With rise of the Internet, businesses can reach customers without the constraints of geography or capital. Given this, one can build a business that is really specific to a very tightly defined group of target customers and not have to worry about there being enough of them in any given geography.

All new brands will be born on the Internet, as it provides the ubiquitous and omnipresent platform for a deeper and more intense relationship with customers. The Internet has also provided new brands with an incredible opportunity to launch their business at a fraction of the cost and in a fraction of the time it took before.  What’s more, the Internet creates incredible market transparency. As an investor, if I want to get a very rough idea of your sales traction and market interest, I only need to look at your social media following and engagement metrics.  I can also use Google to see how much you show up in searches. It’s not exact, but it gives me (and everyone who is thinking about starting a brand) a pretty good idea of where your company is in terms of its growth.

I would bet that Lululemon, if it were founded today, would have started on the Internet. The trajectory of this new Lululemon — Lululemon Prime, let's call it — might look like this: they make a beautiful product that their customers adore and then scrape together a store on Shopify to sell it (disclosure: Shopify is a FirstMark portfolio company). In their adoration, customers scream at the top of their lungs about this incredible brand on social media. Everyone runs online to Lululemon Prime and buys its products. The company grows rapidly, trying to keep the wheels on the car as it screams down the highway. The founder is tied up speaking to the press about how brilliant they are and how they have reinvented fashion.

Meanwhile, with huge amounts of hype and exposure surrounding this great new company, other entrepreneurs see the market opportunities they are missing: the Lululemon for serious Yogis, the Lululemon for women who are a little larger, the Lululemon for women who are a little smaller, the Lululemon for women who want to do Yoga in luxury clothing, the Lululemon for women who practice Hot Yoga, the Lululemon for women who want to only look like they do Yoga, and so on — each brand addressing a micro-segment of the Lululemon Prime target market and each one connecting with customers better and more specifically than Lululemon Prime, because these brands are aiming to mean something more to fewer people. As Lululemon Prime adds products and tries to appeal to a broader audience, they diluted their message and begin to mean less to their original core audience. The smaller, more focused competitors take the edges of their core market by meaning something much more specific and true to their customers. If you don’t think that would happen, a few quick searches on Google turns up more than 100 very specialised competitors in the Yoga apparel market.

Now, the original Lululemon had five years to figure things out. Lululemon Prime would have less than a year. By demonstrating early traction and a very high growth rate, companies have been able to raise a lot of money at point where their revenue size and growth rate are out of sync with their level of organisational competence and capabilities. When you don't have any money, you do things you need to do. You build muscle and strength as you build your team; you learn your customer better and you master the processes that you need to scale. When you have too much money you do things you can do. You hire people who, in turn, hire more people. And all these people have bought into the hype of being part of a mega-valued, social media darling.


The science of scaling a business is built upon the replication and amplification of processes that matter. When you have lots of people doing lots of things that may or may not matter, how do you scale successfully?

Think of a company as a boat with rowers. Putting too many rowers in a given boat sinks it; putting the right rowers in the right seats with the right cadence wins a gold medal. Lululemon, had five years to figure it out before anyone really knew they existed. Lululemon Prime would have months.

The Impact on Investment Returns

The biggest mistake investors and entrepreneurs make repeatedly is they infer long-term growth from short-term growth. On the Internet you are connected to everyone so your ability to find a customer is unprecedentedly easy — at first. As with Lululemon Prime, a brand is discovered, customers go crazy on social media and the company sells a lot of product. The revenue ramp looks amazing, so investors flood the company with money expecting it to continue to grow at this rate. But the company grew so rapidly at first, because it was so specific and was able to reach the customers with whom their message resonated really easily. As the company reaches a certain size, competition and a diminishing remaining pool of potential customers make the acquisition of each incremental customer increasingly difficult and expensive. Revenue flattens. Investors who thought that unprecedented growth would go on forever are, instead, left with a company that, while meaningful in size, falls far short of the expectations that drove their frenzied investments.

As both an entrepreneur and investor in this market, I have the opportunity to meet with dozens of people each week who tell me that they will be building the next billion dollar company behind the brand that they have created. I’m amazed at the indignation I get when I ask: “What if you have a brand that is only $100 million in size?” The typical response is something like, “Well, I’ll show you” (and I hope they do). But my amazement stems from the fact that they believe $100 million is a failure or a consolation prize.

But who would not want a $100 million revenue company with 20 percent EBITDA (earnings before interest, taxes and deprecation and amortisation) that is making something beautiful and wonderful for a base of customers who would kill for them? At a typical 10x multiple of EBITDA, the company would be worth $200 million. Is this a great return? Sure, if you raised a relatively small amount of money at reasonable valuations. But not if you raised a lot of money at a high price.

For instance, let’s say you raised $200 million at a valuation of $1 billion post-money (i.e. you sold 20 percent of the company for $200 million). This sounds great because you only gave up 20 percent for a large amount of capital. Except for one thing. The investors get their money first, because in most private company transactions, investors have preferred stock. So, in the end, depending on how much you raised, there may not be much, if any, left for you, the entrepreneur, despite having built a very successful business — and that’s in the case of a great outcome.

Many start-up brands who have enjoyed early success have believed that they are worth more than social media platforms that have achieved valuations of billions of dollars with little or no revenue. What they are missing is that these social media companies are platforms for the expression of millions of opinions, while a brand is the expression of one specific opinion — and the brands that will be born from now on will stand for very specific opinions. Indeed, they must mean more to fewer people than ever before if they hope to achieve success.


The Path Forward

There might be exceptions to my prediction that there will be no more new $1 billion fashion brands. I think wholesale-driven brands started by large manufacturing-oriented companies with wide distribution will always be able to create mass-oriented, license-driven product, though whether these kinds of brands will last remains to be seen. Another exception could be a case where there are finite or proprietary manufacturing or technology resources that a company has secured. But these types of companies are few and far between and most entrepreneurs will not find themselves in a position to execute on these types of strategies.

I truly believe that there has never been a better time for an entrepreneur to build his or her business, because so many barriers to entry have been lowered or removed. Rather than fight the new laws of the universe that have come into place because of advancements in technology, embrace these changes and build a brand that truly connects to a specific group of customers across geographies in a highly intimate and personal way.

Will this type of business be a $50 million revenue company or a $500 million revenue company? Nobody knows until you build it. But with the right capital structure, any company that can build a brand that delights its customers can be an economic win for all involved.

Lawrence Lenihan is managing director of FirstMark Capital.

Disclosure: Lawrence Lenihan is part of a consortium of investors which has a minority stake in The Business of Fashion.

The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.

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