October 2, 2013 6:29 pm

Fashion finance: Start-up funding proceeds with fits and starts

Heirs apparent to Net-a-Porter sink without a trace

Despite a recent explosion in third-party capital for starry fashion eventures, from the $44m garnered by Far Fetch this March to the $229m raised by Gilt Groupe over five funding rounds, a recipe for success remains elusive.

For every Net-a-Porter – the luxury ecommerce site sold by Natalie Massenet in 2010 to Richemont for $500m – numerous other heirs apparent, often backed by hefty venture capital funding, have sunk without trace.

Fashism, a social commerce site backed by actor Ashton Kutcher, folded just last week, following Go Try It On, Lux Up and the notorious Boo.com, which went under in 2000 after burning through $135m of investor cash in just six months.

And yet investors such as Balderton Capital, a European-focused early stage technology venture fund based in London, remain undaunted. Last month it closed a $20m funding round alongside Condé Nast in Vestiaire, a vintage luxury online retailer.

Balderton has made sizeable investments in nurturing British fashion start-ups: a $9m investment in fashion retailer My-Wardrobe; and an early 30-40 per cent stake in underwear etailer Figleaves. It made its name in online retail investing as the largest institutional shareholder in Yoox – whose €260m initial public offering valuation was the only Italian IPO in 2009.

So what do they think they understand that others don’t? “What changes the stakes with fashion business models is that you have to factor in consumers’ emotional reaction to product and presentation, not just functionality. That can be very hard to predict,” says Harry Briggs, a principal at Balderton, which was founded in 2007 as a spin-off of Silicon Valley titan Benchmark Capital, a leader in the US market with stakes in style-driven groups such as Polyvore, 1stdibs.com and eBay.

Benchmark’s $6.7m investment in the latter in 1997 skyrocketed to a value of $5bn in less than two years. In an attempt to maximise profits within an overcrowded and unpredictable market, Balderton has shifted investment focus from follow the leader launches and towards start-ups with disruptive potential for the retail industry.

“The more of a game-changer an idea could be, the earlier we want to invest – nowadays we avoid duplicates until further down the line, when they’ve been able to demonstrate sustained growth prospects,” Mr Briggs says.

Its shift in mindset – also apparent in leading funds elsewhere – is being felt by many European start-ups, which continue to lag considerably behind US counterparts in securing external funding. And, while Britain continues to receive more venture capital investment than any other EU country, UK companies received 15 per cent less funding in the first half of 2013 compared with 2012.

As a result, some industry observers have questioned the sustainability of ongoing investor excitement and even warned of a growing “fash-tech bubble”.

“A nervous urgency is definitely afoot in the space as companies jostle for market share – often at the expense of profitability,” says Oliver Chen, a retail analyst at Citigroup, who nevertheless says he does not believe it is a bubble situation.

“Yes, some companies are falling flat, but the rapid innovation and growth rates driving the fash-tech shopping space – ecommerce and m-commerce are having 20 per cent and 40 per cent annual growth, respectively – won’t be going anywhere soon.”

Tech investment bank GP Bullhound predicts 16 per cent compound annual growth rates between now and 2016 for the online apparel sector, a powerful boon to digital retailers as customers become more accustomed to lower prices, a range of choice and flourishing convenience of apps and web-based platforms.

Mr Briggs is bullish on the opportunity. “Technology gives both established fashion brands and start-ups more options and opportunities to powerfully connect with consumers, plus the chance to transform antiquated supply models, gain repeat customers and trim down margins,” he says. “The metamorphosis of the space will only speed up from here.”

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