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Fashion’s digital start-ups are going to have more trouble raising eye-popping sums of money from the suddenly cautious venture capital crowd.

Last year, Warby Parker drummed up $100 million, Farfetch scored $86 million and Moda Operandi brought in $60 million. But the spigot’s been turned way down and experts predict that digital fashion players will have a harder time raising money this year. That could come as a shock after a period in which the online retail and apparel scene was defined by start-ups that secured monster rounds of funding, a trend that led to frothy investments and inflated valuations.

Revolution Ventures, the venture capital firm started by AOL’s cofounder Steve Case, has already started to recalibrate. The firm invested in just one new deal last year — the insurance start-up PolicyGenius — after investing in five in 2014.

“We pulled back pretty significantly on investing last year – not because we weren’t seeing interesting new companies, but because valuations were way ahead of where the actual businesses were,” said Clara Sieg, a partner at Revolution Ventures. “It was really frustrating. We saw record amounts of venture capital deployed at skyrocketing valuations, but we tried to remain disciplined.”

The 11-year-old firm has invested in Shinola and Sweetgreen, and Sieg has personally invested in activewear e-commerce site Carbon 38.

An entrepreneur who started a New York-based, revenue-generating location analytics company called the current venture market disheartening. After closing a seed round last year and pacing six months ahead of schedule on the start-up’s 18-month plan, the founder, who requested anonymity, wanted to “capture the moment” by raising a Series A.

But the feedback he’s gotten thus far — from East and West Coast venture capitalists alike — is “why would we invest now if the cost for this asset is going to go down in a few months?”

“If you look at pre-Series A companies as an asset class, those assets are going to be priced cheaper in the next couple of months for the mere fact that everyone is sitting on the sidelines right now to see how everything is shaping up,” he said. “It’s the worst freaking time to raise money. They [venture capitalists] still have the capital, but they’re taking a pause and seeing where things shake out.”

Venture capitalists invested $58.8 billion overall in the U.S. last year, according to a report from PricewaterhouseCoopers and the National Venture Capital Association that used Thomson Reuters data. Upward of 1,400 companies raised funds for the first time, and there were 74 deals involving investments of $100 million or more last year, a nearly 50 percent increase from 2014.

The issue is that many best-in-class e-commerce start-ups (companies being valued at one- to two-times revenues) secured valuations during previous rounds that were many multiples above that.

The reset in valuations could impact both high-flying start-ups and those eager to mimic them. For best-in-class companies, the drop in valuation multiples means when they go to raise another round of funding, they will come away with less. The dynamic could also frustrate investors who bought in at the high. Hudson’s Bay Co.’s deal to buy Gilt Groupe for $250 million was nowhere near the $1 billion valuation it once held, leaving some of the flash-sale site’s early tech investors grumbling. Last year’s fire sale of former e-commerce darling for $15 million (it was once valued at $1 billion and raised more than $335 million in funding), as well as the flameouts at Beachmint and Shoedazzle, were wake-up calls to an industry long accustomed to the mantra that fast growth was the priority and profits would come later.

Not any more. It may have taken some time, but the new venture capital motto is: profits matter. Going forward, in order to get funding, companies will have to show a clear path to profitability. A new golden metric is taking shape: first-order positive contribution.

“It’s not about underwriting to a contrived, high lifetime value [of a customer] — it’s about positive contribution on the first order and the ability to grow a sustainable business with healthy unit economics,” Sieg said. That means that on the first order, a business should be able to cover its product costs, shipping and fulfillment, and customer acquisition cost — and still have margin left over.

She compared this to the days of underwriting to lifetime value greater than customer acquisition cost, which can often result in an upside-down business as the cost of customer acquisition goes up and lifetime value trends down. Essentially, start-ups chasing growth with fresh capital can wind up paying heftier prices to acquire a broader base of customers, who aren’t necessarily loyal, repeat shoppers and therefore may have lower lifetime values.

Nick Brown, a partner at New York-based venture capital firm 14W, is also zeroing in on profitability.
Brown said companies are either raising a “war chest” of cash to last them indefinitely or focusing on achieving some level of profitability.

“[Fund-raising] processes are taking longer, people have a lower expectation of where valuations should be,” Brown said. “Valuations have gone down. A valuation for a company doing $10 million in revenue is lower today than it was for a company a year ago doing $10 million in revenue. That’s clear.”

Growth, however, isn’t necessarily contingent on tons of capital, he said. A business doesn’t have to grow quickly or reach profitability; it’s not one or the other.

Take two-and-a-half-year-old sneaker brand Greats.

Launched in August 2013, founder and chief executive officer Ryan Babenzien said the company has been able to scale and turn a profit. He said the venture capital market is in a “state of correcting the severely overvalued companies they helped overvalue.”

Greats has one retail store in Brooklyn — which compares to the likes of Warby Parker or Bonobos, each of which has more than 20 stores — and Babenzien said the business has solid unit economics and a scalable customer acquisition cost to lifetime value ratio.

Greats raised a $4 million Series A last year and a seed round of $1.5 million in 2014. Industry sources project revenues to hit $20 million to $25 million this year.

“We can’t make enough inventory to meet demand even though we turned inventory six times in 2015,” Babenzien said, noting that the brand has been plagued by inventory shortfalls since its inception. “More capital allows us to make more shoes to meet demand. However, we don’t necessarily need to do another equity round to solve that.”

That self-financing lesson could be one brands stuck on the funding treadmill might have to learn quickly.

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