A route from being an emerging designer to becoming a global business is complicated and not for everyone. But if the ambitions go further than selling exclusively to a handful of loyal clients, financing might be the only way to grow. What are the options? Fashion investment is complicated, even for the investors.
What can you do before raising capital?
Before starting to look for investors, let’s think about the alternatives. I will not talk about family money and savings here – you should have done that already. If you’re afraid to lose the £10K you saved since college, probably you should think again before raising funds externally.
Competitions and Awards. LVMH Prize, Vogue and CFDA Fund, Andam Fashion Award, Newgen, ITS, you name it. There are quite a few awards supporting young fashion designers granting 200-400K US dollars and industry mentoring. Naturally, only a few succeed in front of the judging panel of industry celebrities. Most of the time, though, the prize or award is tied to a specific country. What’s worrying – will the cash and one-year support be enough to grow a brand to a sustainable business? A general rule is – the more you grow, the more you need to invest. The advice is to be cautious and very clear about your business strategy for the next 3 to 5 years. The award, on the other hand, might be your best route if your brand’s core is a creativity as opposed to business strategy. The LA-based D2C brand Anine Bing, who raised $15mln in her Series A just earlier this year wouldn’t have won an LVMH Prize. In the same way, Ludovic de Saint Sernin, the most recent receiver of the LVMH Prize, wouldn’t have raised traditional VC money at this current stage. Investors are looking for sellable, scalable, commercially viable brands. LVMH is looking for a designer to potentially join one of their brands.
Grants and Institutional Support. Some of the governments are better at it than others. For example, Arts Council England invests in Art and Culture projects (including design), awarding grants. The good thing is, it is a grant, no return on investment is expected, the limitation is an amount awarded. For a growing fashion brand, the £20K grant will last a season. Unfortunately, many governments do not prioritise apparel and textiles sector thus support is limited or unavailable. Institutional support, however, is worth exploring, as strategic funds and programmes (such as the European Commission’s programmes) may help maintain your business operations in the meantime.
Bank loans. A startup bank loan is a conventional way of growing or establishing a business based on a business plan and your financial track record. Sometimes, you will have to have a guarantor who would take responsibility for paying your debt in case of the bankruptcy. The trick here is, banks are reluctant to support creative industries as the operational cycle of a fashion brand is completely different from a conventional startup business model which is worrisome for traditional financial backers. However, a bank loan is quite often a standard route for a fashion brand with a good business plan after they’ve spent the savings and family loans. It is important to remind, the more you grow, the more you need to invest.
“We were at a breaking point, and we really needed investment to move forward”, reflects Scottish designer Christopher Kane upon taking a majority investment from Kering. Christopher Kane and Tamara Kane have been running their business on bank loans until they reached a point where the debt was overgrowing the fashion business cycle. Kering stepped in an offered a helping hand.
Types of investors
It is now time to talk about the types of investors you will engage with when raising capital. But before that, we should point out one thing. Raising money means partnering with a financial backer in exchange for a portion of your company. Financial angels are not actually angels; they are business people interested in getting involved and own part of your company.
Angels or HNWI (High Networth Individuals). A business angel is someone who will typically have some interest in the field you operate within (fashion) and has the cash to spare. Sometimes they would also have some expertise to share. Your first financial backer might be an HNWI, who has been your client and would like to acquire a minority stake (aka non-controlling) in your company. This scenario is quite often in the fashion world. For example, one of the keen fashion Angels in the UK is Eiesha Bharti Pasricha, who’s invested in Roksanda, Fyodor Golan and other London Fashion Week brands. Similarly, Chinese heiress Wendy Yu has entered the European fashion world by supporting the fashion industry and some designers specifically, such as London-based designer Mary Katrantzou. There are many more low key angels in fashion who become first investors. Partnering with an angel, though, is very personal. You are both signing up for a partnership and working together from now on.
Private Equity. First of all, a Private Equity fund will look at a certain size of a business and most of the early stage brands are too small for their portfolio of companies. Traditionally, a PE will look for a growth stage ($20mln turnover or more) company for a turnaround. Meaning, the investor will come in to help restructure and expand the business. Moreover, PE funds usually are quite traditional in terms of looking at the fashion industry. In short, they are not equipped with operational knowledge but are capable of hiring all the right people to do the job for them. Normally, a PE investment will be a majority investment with a controlling stake in the business. One of the famous examples of the PE fashion investment was Phoenix capital investing £9mln in Jimmy Choo brand back in 2001, buying all shares from Jimmy Choo, the designer, who wanted to exit his namesake business after the infamous Tamara Mellon’s takeover.
Venture Capital/Boutique Investment Funds. Although VC is the term commonly referring to the tech sector, some VC funds will invest in fashion brands and will take the hands-on operational approach. Some examples of active VC funds in the fashion industry are Felix Capital, 14W, Pembroke Ventures. The difference from the PE fund is that Venture capitalists will come at the earlier stage, will generally be interested in the minority stake and will become your partner for acceleration and growth. Boutique investment funds such as Imaginary Ventures or One Luxury Group have similar functions as a traditional VC; the main difference is that instead of having a portfolio of companies they do investments one by one. It is worth noting here that a VC fund is an underexplored route of financing for fashion brands and will probably grow in the upcoming years.
Whatever is the route you choose, raising capital is a full-time job and will usually take around 12-13 months, thus it is essential to be prepared and consistent with your strategy. Next time I’ll share the investor’s point of view and mistakes to avoid when raising capital as a fashion business.
Felix Capital on their investment in Anine Bing: https://medium.com/@FelixCapital/anine-bing-the-la-based-lifestyle-and-fashion-brand-has-joined-the-felix-family-f111443dc95c
A platform for startups to meet angel investors: https://www.angelinvestmentnetwork.co.uk/business-proposal/industry-fashion-beauty-21
Tamara Mellon’s view on Private Equity investments: https://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10340191/Jimmy-Choo-founder-Tamara-Mellon-puts-the-boot-into-private-equity.html
Ongoing investments in fashion: https://www.crunchbase.com/hub/fashion-startups#section-overview