In the midst of fashion’s many changes, financing realities remain — and brands just starting out have to be ready to lose $3 million or more in their early years before they start to win.
Despite all the talk about the troubles of department stores and the growing promise of the web, designers and brands wanting to borrow can find it easier if they have an order in hand from a Neiman Marcus or Barneys New York.
Hip e-commerce companies, designer dynamos and more democratic mass players all need some amount of money to get their start and keep the lights on and grow once they’re established.
Kickstarter and other crowdfunding platforms have been a boon for many, from the 8-in-1 Evolution Bra that raised $1.5 million to the Ace Marks dress shoes for men, which raised $905,000. But even with such meaningful grassroots boosts, companies might well find themselves scrambling to cover their costs.
So it helps to have a patron.
“Most fashion brands, they’ll generally end up spending $3 million before they get profitable,” said Ari Bloom, an apparel veteran and chief executive officer of tech firm Avametric, which builds virtual fitting room software being used by Gap Inc.
“The situation with start-up fashion for many years has been a bit of a rich man’s game,” Bloom said. “You kind of have to have your own capital or family money or something like a rich uncle or somebody supporting you because the economics of small fashion companies are horrible. It’s very hard to make money until you have $5 million to $10 million of sales.”
Bloom said some young companies gain traction with 500 people who are one or two steps removed from the founder and mistake what he called a “hypothesis” for “proof of concept.”
“I would encourage young designers to not fall back on the idea that they’re going to design the best product and someone’s going to swoop and invest in them,” he said. “Building a better dress or a better handbag is not enough. You have to have something truly different if you want to get sophisticated investors. It’s not about the most talented person in the room — it’s about the best idea and the best execution.”
Even piles of money and a big name don’t guarantee success. Tamara Mellon raised $24 million to launch her namesake brand in 2013 but went bankrupt two years later (although she later raised $12 million in a Series A funding round led by New Enterprise Associates for her latest pure-play venture). And Reed Krakoff at Coach started his brand with the seemingly endless resources of the group behind him, but hit a wall with overly ambitious plans.
For most, having too much money isn’t the problem.
And so entrepreneurs starting out need to sell on two fronts. They need to sell themselves and their vision to would-be backers and lenders and they also need to have proof of some kind of consumer support, high-profile wholesale accounts or steady flow online with healthy margins and reasonable returns.
“There are some basic, basic principles you have to adhere to,” said Gary Wassner, chairman of fashion investment house InterLuxe and a lender to many designers through his factoring firm Hilldun. “If you’re going to look for financing, if you’re a start-up or a young business, you must have bona-fide orders from retailers that we can credit check. You have to have orders from legitimate stores and they cannot be consignment.”
An order from Saks Fifth Avenue, Neiman Marcus, Bergdorf Goodman, Nordstrom or a well-respected specialty store with payment terms of 30 or 45 days conveys what Wassner described as “instant credibility.”
Still, that’s just the start.
Wassner said brands selling high-end product should have good gross margins — a percentage in the high 50s, 60s or higher.
“It’s a promotional environment, so if you don’t have enough gross margin, in the end you make nothing,” he said.
E-commerce brands can easily demonstrate how quickly their sales are increasing, but they also make sure their business isn’t eroded by consumers deciding they don’t want their orders after all and sending them back.
“You’re looking for a return rate that’s not in excess of 35 to 38 percent,” Wassner said. “You’re looking for lower return rate percentages or repeat business.”
Michael Stanley, managing director and head of factoring at Rosenthal & Rosenthal, said it was easier in some respects to finance a wholesale business.
“If you’ve got an invoice for $10,000, you’re probably going to get $8,000 from the factoring company that day,” Stanley said.
On the other hand, direct-to-consumer businesses sending individual orders out to even a large customer base can find it hard to borrow against that business since lenders have no way to gauge whether those customers will actually pay or who will pay them back if something goes wrong.
“We can do it and we do provide financing, but if it’s just a direct-to-consumer business model, it ain’t easy,” Stanley said. “I could go chapter and verse on all these guys who have started, went through an enormous amount of investment money and it burnt down. Just to manage the business, it’s very expensive. The returns of product are substantial…the cost to attract new consumers is very expensive.”
Selling through Amazon, which offers a one-stop online consumer shop of sorts, is a good option for some.
“Amazon will buy your brand at a certain cadence,” he said. “They’ll go on a replenishment program where they’ll manage the inventory and it works out well, we’re happy with it because it’s a secure environment — they’re Amazon.”
The web and the pressure it’s helped bring to bear on the retail scene have also pushed companies to operate more quickly with a steady flow of product instead of just a few major seasons. And more brands are pushing out in to global markets where even established names find themselves starting anew.
“We’ve seeing brands that have been in place for a really long time that we would consider almost a start-up because they’ve stayed in place in their domestic market,” said Cate Luzio, global head of international subsidiary banking at HSBC, which has a network around the world and a view on many brands’ suppliers and customers.
Despite all the hurdles, new business awaits for brands in new markets and online — if the formula is right.
Luzio pointed to Net-a-porter, one of HSBC’s customers.
“They’ve got a very good partnership with their banks, who understand their strategy, how they’re growing, the structural change in their business, the trends they’re seeing, also where they can source from and how they’re using that supply chain,” Luzio said.
She said the web has changed the industry, with exposure on social media more important than ever, but that businesses still need to borrow against their financials and not their friends and “likes.”
“Instagram is a phenomenon that, if I want to shop and I’m on Instagram, I now have immediate access to that. That’s impacting the brands and it’s impacting us as a bank.”
But as of yet, a big social following is more buzzy than actually bankable.
“You can’t use that as ‘collateral’ at this point,” Luzio said. “Maybe in the future, but now it’s still hard-core financials.”