The myth of the fast growing fashion startup

0


[ad_1]

Over the past decade, fashion startups with disruptive business models – from direct-to-consumer brands to clothing rental platforms – have taken the industry by storm. Now, many of these once-dilapidated startups are going public.

This year alone, ThredUp, Poshmark and Warby Parker went public; Rent the Runway and Allbirds have filed for IPO and are expected to go public soon. A review of the financial data of these companies reveals that none of them have succeeded in building a profitable business while growing fast enough to meet investor expectations. And some shares of these companies, including ThredUp and Poshmark, have remained stable or have fallen since their IPO. All of this begs the question of whether the era of the fast-growing, venture-backed fashion startup might be coming to an end.

Why now?

While it might seem surprising that all of these companies are so close to each other, there are some more important trends that help explain it. For starters, many of them were launched around the same time, about 10 years ago, says Dan Frommer, senior tech journalist and editor of The new consumer. They also received significant capital from investors who treated them as if they were technology companies with the potential to grow rapidly. (Rent the Runway, the group’s oldest, launched in 2009 and received $ 500 million in funding; Allbirds, the most recent, launched in 2015, received $ 200 million.) But these investors are looking for a return on their capital. which means to become public or to be acquired. “In the venture capital business model, companies should post returns on these funds somewhere between 5 [and] 15 years, ”says Frommer. “So the minute a business takes venture capital funding, it’s on a timer. “

And 2021 has turned out to be a particularly good year to go public, according to Sucharita Kodali, senior analyst at Forrester Research, specializing in e-commerce and retail. There have been a record number of IPOs this year, in part because companies postponed them last year when the pandemic caused so much instability in the market. Now, investors are looking for places to put their money. “Among the richest people there is a ton of money flowing,” she says. “Last year, people couldn’t travel, buy cars or eat in restaurants. So if your net worth is growing and you don’t have much to spend your money on, you might want to invest in an IPO.

Many brands that have gone public have now weathered the general retail downturn and thrived during the pandemic, so it makes sense that they would want to capitalize on that success. In the case of ThredUp and Poshmark, there was already a growing demand for used goods; during lockdowns, consumers have turned to these platforms to purchase these products online. Warby Parker quickly moved from its retail stores to its existing e-commerce business, while Allbirds clothing and athletic footwear offerings were items people wanted during the pandemic.

Rent the Runway stands out in this regard, as it hasn’t had a particularly strong year. The company built its business on renting clothes for fancy events and the office, but consumers didn’t need formal wear for much of 2020 and didn’t dress for work. While the company says business is starting to pick up, the Delta variant has postponed many events and delayed the return to work. “I’m scratching my head at their IPO decision,” Kodali said. “Their numbers are down, and there is nothing particularly compelling about their business right now.” According to the company’s S-1, its active subscribers have grown from 133,572 in 2019 to 54,747 in 2020. This year, subscribers appear to be returning, but they are nowhere near pre-pandemic levels. Frommer suggests that the reason for the IPO’s timing could be that the company needs to raise capital in order to keep the business going.

[Photos: White House Flickr (Archived), Sophie Backes/Unsplash]

The future of fashion

These IPOs reveal exactly how difficult it is to both generate profits and grow rapidly as a fashion startup. Frommer says many of these companies were much more technologically advanced than their predecessors, so investors treated them like tech companies. Warby Parker and Allbirds, for example, created digital native brands that took advantage of everything the internet had to offer, from social media to immersive websites. Some investors were hoping that successful e-commerce brands like these could eventually take over the market. But it turned out that there were limits to their growth. Unlike software companies, these brands have had to develop products, build supply chains, and eventually build retail stores, all of which are capital intensive. A decade later, Warby Parker only has a 1% market share in terms of revenue, according to his SEC filing in August. By comparison, Lenscrafter’s parent company, EssilorLuxottica, dominates with 20% of the market.

For Rent the Runway and ThredUp, the challenges were even more complex. Both companies have collected large amounts of data on their consumers and created systems to digitally label clothing. They also had robust online sites where customers could filter clothes for rent and buy. But for it to work, they had to create the physical infrastructure to process the clothes. Rent the Runway built the largest dry cleaning facility in the world, and ThredUp built huge warehouses to collect, photograph, and ship second-hand clothes. Again, all of this requires a lot of capital.

Warby Parker had a successful IPO last week, reaching a market cap of $ 6 billion on the first day of trading. It is too early to say how the company will perform in the public market over the long term: some analysts have said the company is overvalued; others thought it was deserved because the company has good margins, an engaging brand history, and is likely to continue to grow. Poshmark’s stock, on the other hand, has steadily declined since its IPO in January. Its third-quarter revenue was lower than estimated, which he attributed in part to Apple’s new privacy policies that make it harder to track users and market them effectively. ThredUp’s share price, meanwhile, is near its public debut in March. While analysts believe the company has room to grow as the resale market recovers, its net losses are increasing each year as it continues to build new warehouses to process clothing. These losses are typical of a business in growth mode, but are something investors are watching closely.

The performance of these companies shows how difficult it is to build a profitable and high growth fashion business. Venture capitalists have injected hundreds of millions of dollars to help these businesses grow, but much of that capital has gone into expensive infrastructure, from warehouses to retail stores. And over the past decade, the market has been crowded with other fashion startups, resulting in more intense competition for a fixed number of consumers. It is also increasingly expensive to acquire new customers on social networks, which reduces their margins. “None of these companies look like they will be the next Amazon,” Kodali says.

With their IPOs, these companies will no longer feel pressure from venture capitalists, but new concerns will emerge: They are now beholden to shareholders with their own expectations for growth and profitability. And if they do not perform well, the founders risk being removed from their management positions by the board of directors. In many ways, it’s off the frying pan and on the fire.

What next?

There are other brands in this cohort of startups that might decide to jump on the IPO bandwagon, including Everlane, Away, and Glossier. These brands have collectively raised more than half a billion dollars in venture capital funds, so their investors may soon be looking for a salary. But as a new generation of entrepreneurs begins to set up fashion businesses, they may not be inspired by publicly traded companies. Kodali says that instead of raising huge amounts of venture capital and growing exponentially, today’s startups might be more inclined to grow more slowly, but seek profitability. They could take a page from companies like men’s clothing brand Buck Mason, jewelry brand Aurate, or women’s clothing brand Cuyana, which have taken much smaller funding rounds and focused more on creation. sustainable businesses.

Kodali points out that with startups founded a decade ago, entrepreneurs aimed to own a small stake in a billion-dollar company. But today’s entrepreneurs might be more inclined to own a larger stake in a hundred million dollar company. “You have to work a lot less hard to be a hundred million dollar company,” she says. “There are fewer barriers to entry, you’re under the radar and you don’t have a target on your back when you’re smaller. And at the end of the day, you earn that much money.

[ad_2]

Share.

Leave A Reply