Venture capitalists are preparing their exit strategies.
That’s one reason why VCs focused on fashion or the world of fashion technology have committed $150 million in follow-up investments since the beginning of the year. And while initial public offerings are the sexy exits that dreams are made of, the acquisitions front is where the action is at for most emerging firms that have garnered VC investments.
David Freschman, an early stage venture capitalist and cofounder and chief executive officer of fashion technology networking group FashInvest, said, “VCs are coming in for the Series B round to provide expansion capital. These funds are used right now for market expansion, customer acquisition and technology enhancements. Investors are looking to exit [their investment] through an acquisition.”
According to Freschman, angels and early stage investors typically feed the Series A rounds. In Series B rounds, existing investors up their investment and bring in new partners because capital is necessary for an exit. That’s because the still relatively young firms require more capital so they can continue building on their growth trajectory. RELATED STORY: Fashion Investors Eyeing Bigger Deals >>
Karen Griffith Gryga, managing partner at accelerator Dreamit Ventures, and cofounder and chairman of FashInvest, said, “The basic venture capital model has always been about feeding the winners, and that’s even more so today than ever before. The first round investments are about derisking and proving the model. Every early stage venture capital firm has to be prepared with reserves in capital for follow-up investment because [one’s] portfolio wins when [one feeds] the winners.”
She said it’s really the second round investment decision that can be the hardest one to make: “Knowing when to stop investing in a portfolio company of yours is tough. It becomes like your child and it takes discipline to learn when to stop.”
At the WWD Digital Forum last month, Carly Rosenberg, vice president, e-commerce marketing for Ann Taylor and Loft, said “big data” is a 2013 trend for digital marketers. Rosenberg was referring to more personalized communications between retailers and their customers, but VCs also have their eye on operations that have substantial data assets.
Generally “big data” refers to technology platforms and applications that aggregate all kinds of unique information for different purposes.
Some of the firms that have raised another round of funding this year so far suggest that data analytics platforms are where many VCs are placing their bets. That shouldn’t be a surprise — CB Insights said Monday that firms in the big data sector have received $4.9 billion in funding since 2008.
According to Bruce Dunlevie, general partner of Benchmark Capital, which led the $18 million Series B funding for shopping analytics firm Euclid, “Physical retailers finally have an easy-to-implement, scalable solution for determining the effectiveness of their marketing and operations.”
Josh Goldman, general partner at Norwest Venture Partners, which led the latest $15 million Series B round for customer service metrics firm Stella Service, said, “The company’s proprietary data offering provides valuable, objective insight for measuring, benchmarking and improving customer service, and it has already proven to increase sales conversion for merchants.”
Other firms fueled in part by their use of social media platforms such as Julep and StyleHaul closed on new rounds of financing, while a concept such as Rent the Runway in a sector where there’s no other competitor has closed on a Series C round of funding.
So if these are the firms whose business model have passed investment muster from the VCs, what’s next?
Griffith Gryga said many firms are currently working with their portfolio companies on building a dual exit strategy. That’s why one often hears a company executive or investor stating that the emerging firm has “multiple exit options, with the potential for an initial public offering,” she said.
Still, exits in the industry are more often than not dominated by M&A activity. “There are two inflection points when it comes to exiting an investment. One point is early in the company’s development. These are the technological acquisitions we’ve seen more of in the past couple of years,” she said, explaining that these firms are at the life stage where it makes more sense to exit early, even though it may mean a smaller return on one’s investment.
The other inflection point is when a company shows there’s some momentum on the revenue development side. These are the firms that get acquired later, and sometimes go the IPO route.
The IPO route is rare, noted Freschman, who pointed out that the “costs of doing an IPO are extraordinarily expensive for small emerging companies. The regulatory issues connected with the Sarbanes-Oxley Act require millions just to get yourself in shape to go public.”
Scott Friend, managing director at Bain Capital Ventures, which has invested in several rounds of fund-raising for the rental firm, said, “Everyone is more bullish about its long-term prospects. Performance has been so good and the operating metrics keep improving.”
He explained that one benefit is that the model doesn’t have any competitors, but it does require a lot of capital since it has to build from scratch the technology platforms tailored to the specific needs of the business.
“The only reason to invest in the system to improve the operations is because we all have conviction over the scope of this business opportunity,” Friend said, explaining that “we see how consumers shop. We see how they interact with luxury and fashion. That’s exciting for us.”
While Friend acknowledges that one never knows for sure, he predicts that Rent the Runway will go the IPO route rather than an investor exit strategy via an acquisition.
According to CB Insights, last year 2,277 private technology firms were acquired globally, with acquirers paying a total of $46.8 billion for the deals where the acquisition price was disclosed. The majority of the acquirers, at 94 percent, were strategic buyers, such as Google and Facebook. As for acquisition price, CB’s research said “more than 50 percent of deals are less than $50 million and more than 80 percent of the acquisitions are less than $200 million.”
While a Google could be the dream exit for technology platform firms and those in the “big data” sector, fashion businesses could be the target of traditional retail companies, such as Nordstrom Inc.’s February 2011 acquisition of flash-sale site HauteLook Inc. in a stock deal valued at up to $270 million.
@fearofgod and @maxfieldla have teamed up on a pop-up installation. The store, located in the gallery space across from Maxfield’s Melrose Ave location, is the site of the brand’s House of God pop-up in which Fear of God founder @jerrylorenzo has created a church-inspired installation. A dozen vintage church pews sit in front of an LED screen playing 90s gospel singers in an effort to re-create an environment akin to a Southern Baptist Church, Lorenzo explained. Read more about the pop-up on WWD.com #wwdfashion (📷: Jennifer Johnson)
Known for his sleek, sophisticated American glamour, Norman Norell is the subject of an upcoming exhibition at @fitnyc. “Norell: Dean of American Fashion,” which runs from February 9 through April 14, will feature approximately 100 ensembles and accessories. His best work is exemplified by the designer’s glittering “mermaid” gowns frosted with thousands of hand-sewn sequins – like the one pictured. (📷: William Helburn) #wwdfashion
For pre-fall 2018, @balmain didn’t let go of the glitz. A crystal embroidered baseball jacket priced at around $40,000 hangs in the “couture” section of the brand’s first men’s pre-collection. Sporting the words “Balmain Army” across the back, the item took around two months to make. “When it was completed, it was like Christmas, it was like, ‘It’s done, it’s exactly what I wanted,’” said Balmain’s creative director @olivier_rousteing during a tour of the collection in a Paris showroom on Monday. #wwdfashion
Eighty degree temperatures and outdoor installations at the annual Art Basel Miami Beach called for bright, elevated beachwear. See more street style pictures on WWD.com. #theyarewearing #ABMB (📷: @lifeinreverie)
Following September’s emotional tribute to her brother Gianni, Donatella Versace wanted to bring the spring show’s deep sense of intimacy to her @versace_official pre-fall collection. Donatella found inspiration in Versace Palazzo in Milan and from Gianni’s opulent apartment. Archival patterns and new motifs were splashed on silk shirtdresses and fitted jersey frocks. See the rest of the photos on WWD.com. #wwdfashion
Demna Gvasalia continues to shake up the Paris fashion calendar — and experiment with new runway timetables for his @vetements_official brand. WWD has learned that Vetements plans to stage its next coed show for the fall 2018 season on January 19 during Men’s Fashion Week in the French capital. Details about the timing and venue have not been confirmed — stay tuned on WWD.com to catch the latest. #wwdnews (📷: @giovanni_giannoni_photo)
@zacposen's go-to holiday gift? Cookies! "I'll usually bake cookies and send them as a gift," said the designer, who recently released his cookbook "Cooking With Zac: Recipes from Rustic to Refined." Get the recipe for his Brown Butter-Chocolate Chip Cookies via link in bio 🍪🍪🍪 #wwdeye #cookingwithzac
For @monsemaison’s pre-fall 2018 collection, Fernando Garcia and Laura Kim honed in on the brand’s many signatures — men’s wear, which was tweaked and feminized through deconstruction, proportion play and lots of bare shoulders. See the rest of the photos on WWD.com #wwdfashion (📷: George Chinese)
On Friday night, @yohjiyamamotoofficial received the Design for Asia Lifetime Achievement Award in Hong Kong. The 75-year-old designer has been celebrated for many years and is best known for his dark and avant-garde tailoring. “In my long career, in design, architecture, [I’ve been to] so many parties, this is the very first time that I have such a warm feeling, I really appreciate this,” Yamamoto said. #wwdfashion (📷: @dominiquemaitre)