Is there a "fashion-tech bubble"?

Posted by on March 28, 2013 @ 3:27 pm

We were asked this week by Imran Amed, founder of the influential fashion blog "The Business of Fashion", whether there was a "fashion-tech bubble".
Over the last few years, large amounts of money have been pouring into the fashion-tech space. Valuations are high, yet the money keeps coming. Some companies are performing well, but others are quietly failing.

* Is there a fashion-tech bubble?
* What one thing separates winning investments from those that are failing?
* Which kinds of investments/business models will deliver returns?

The Business of Fashion article covers this in detail. Here is our view.
Fashion and apparel is a massive, global market (over $1.2trillion). As technology is changing the world, it's natural that it is disrupting fashion too. We have seen a lot of innovation, some technology-driven (through social media and mobile for instance), and some business model-driven (flash sales as pioneered by Ventes Privées for instance). We expect the disruption to continue as consumers are driving it, they want products faster, they want to pay and transact on mobile, they want to be inspired online, etc. This is a massive long-term trend and we are only at the beginning of the technology-driven transformation of retail, including in fashion. Long gone are the days when Nathalie Massenet, founder of Net-A-Porter, could not raise money for her start-up, money has been pouring in the sector all over the world, especially in the US. A few challenges lie ahead, and we can expect a slow-down of the investment pace. Many companies have been funded, not all of them will succeed The number of exits has been limited. Apart from Net-A-Porter and Asos, both of which never raised venture capital, we have not seen big exits in the fashion/tech space, except a few local flash sales companies (Hautelook/Nordstrom or Brands4Friends/eBay). The lack of exits combined with the (too) vast number of very early-stage start-ups in the space will generate many failures in the short term. This is only the natural Darwinian process of the start-up world. There are cycles and suddenly ecommerce is out of favour, especially with US VCs. This is cyclical and will change but refinancings in the space will be hard in the short term, and the "bubble" will deflate until it comes back!

The companies that will find it hard to survive are those that have relied on cheap money to fund customer acquisitions expensively. As an example I am thinking of a number of subscription-based start-ups that have raised significant capital to invest aggressively on marketing, essentially on inflated "life-time-value" assumptions. As reality takes these LTV assumptions down, these companies will have to adapt or pivot, or die.

Another example is the vast number of companies that rely on user-generated content - essentially fashion or product pictures - and want to build business as an affiliate to etailers. This model only works at massive scale like a Polyvore, many small sites, whether on web or mobile, will not make it.

So who are the winners? Eventually the companies that have an inherently profitable model over the long term, thanks to attractive margins and high level of repeat business, a critical feature of successful retail businesses. I am bullish on the future prospects of both Asos and Net-A-Porter who can continue to leverage their strong brands, yielding low acquisition costs in their historic markets. Their challenge will be to conquer new markets, especially in Asia. My favourites newcomers are online brands and marketplaces. Take Nastygal for instance. Here is a digital-driven fashion brand that is selling affordable clothing direct, at gross margins probably well over 60%, without fixed retail costs and with a very acquisition cost thanks to a superb use of social media.

Another favourite in farfetch - in which I am also an investor - which is building a global fashion and luxury etailer with no inventory, global reach and a uniquely curated and broad product offering. Importantly a key feature of all these winners is an exceptional entrepreneur at the helm, with a vision and the ambition to build a large, differentiated business. This is the kind of investment opportunity we will continue to seek.

The Business of Fashion article can be found here: