Fashion Tech Boom: Why It's Happening and How Startups Get Funded

Last year saw a major influx of new fashion-focused tech startups. With the early success of pioneers like Gilt Groupe and Ideeli, an industry that has typically been slow to embrace new technology has spawned a burgeoning community of game-changing ecommerce sites, mobile apps and social networking and discovery platforms. And with no shortage of new ideas or interest from financial backers, this influx shows no signs of slowing down in 2012--and we think that's very exciting. With new start-ups popping up almost daily, we set out to discover which ones are doing it right, how they’re all being funded, and what 2012 holds for the fashion tech biz.
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Dhani Mau
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Last year saw a major influx of new fashion-focused tech startups. With the early success of pioneers like Gilt Groupe and Ideeli, an industry that has typically been slow to embrace new technology has spawned a burgeoning community of game-changing ecommerce sites, mobile apps and social networking and discovery platforms. And with no shortage of new ideas or interest from financial backers, this influx shows no signs of slowing down in 2012--and we think that's very exciting. With new start-ups popping up almost daily, we set out to discover which ones are doing it right, how they’re all being funded, and what 2012 holds for the fashion tech biz.
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Last year saw a major influx of new fashion-focused tech startups. With the early success of pioneers like Gilt Groupe and Ideeli, an industry that has typically been slow to embrace new technology has spawned a burgeoning community of game-changing ecommerce sites, mobile apps and social networking and discovery platforms. And with no shortage of new ideas or interest from financial backers, this influx shows no signs of slowing down in 2012--and we think that's very exciting.

With new start-ups popping up almost daily, we set out to discover which ones are doing it right, how they’re all being funded, and what 2012 holds for the fashion tech biz.

In recent news, Fab.com (a design ecommerce site) acquired Fashionstake, an ecommerce/micro-finance startup we’ve written about a few times. Fab.com is one of the biggest success stories among ecommerce startups. And while fashion has been a relatively new addition to their inventory, it’s been extremely well-received. Cofounder Bradford Shellhammer, who happens to have a degree in fashion design from Parsons, told us “We kept trying out things that veered more fashion and less interior product designs and it was met with tremendous successs. In addition, jewelry is our number two category, so that only gave us more confidence that fashion is a big deal.”

On bringing Fashionstake into their fold (its founders are now Fab's fashion buyers), he explained, “Their mission was the exact same thing, to make fashion democratic, to find these emerging designers that didn't have a platform and help them get their goods into people's hands. What they lacked, honestly, was having an audience. So what we've done now is really a marriage of the two; we’ve built this really expansive audience and they have this very deep rolodex of designers who are itching to sell their products."

A few things factor into what makes a fashion tech startup viable. Macala Wright, an established consultant for fashion brands, founder of FashionablyMarketing.Me and Mashable contributor, says that the keys to succes for a fashion tech startup are the intuitiveness of the technology, ability to mature and change as the way people use technology changes and a focus on doing fewer things better. “The problem with lots of startups right now is they have 5-8 components to them," she said. "They need to do about 1-3 things well.” She cites Polyvore as an example of a startup that does one thing well. And Pose, because it focuses specifically on fashion, even if it is similar to Instagram.

That’s another problem: spin-offs. Part of the reason there is such an overwhelming number of startups to weed through is that many of them do essentially the same thing. For every Pinterest there's a Svpply; for every Warby Parker there’s a Mezzmer. So do these spin-offs have a chance? “Fundamentally a lot of the spin-offs haven’t been the ones that stay around,” Wright said. However, ones that can improve upon a model whose originator is slow to adapt may have a chance. “If they don’t mature and change to the way that online users have become more sophisticated in their social behaviors they’re going to find their traffic falls off and they can be replaced by someone else.” Brand identity is also very important.

Shellhammer insists that the most important factor in having a successful ecommerce startup is building an audience. “What [Fashionstake has] proven is it doesn’t matter what your curation is; it doesn't matter what you’re presenting; you’re not going to sell anything unless you have people on your list to sell it to.”

Fab has found that audience in two ways: First, by making everything on their site extremely easy to share through social media. And second, through the nature of the products they sell. "People that find something really cool--they tell everyone they know about it," Shellhammer says. "Of the two million people on our list, half of them are through social--which meansone million people were invited by another member.”

Of the many startups that launched over the last couple of years, some are getting bigger and bigger while others are starting to have difficulties while still others have totally disappeared from our internets and our consciousness. Some of the successful ones are just getting money thrown at them lately. For example, Fab.com just raised $40 million in their second round of funding. Polyvore just raised $14 million. Rent the Runway raised a whopping $15 million earlier this year. Moda Operandi raised $10 million earlier this year and has been on a bit of a hiring spree. Men’s ecommerce site Bonobos just raised $8 million with a goal of 15. Pose just raised 3 million and added and Android app. And that’s just a few examples.

So where is this money coming from and how and why are these old rich guys who probably know very little about fashion finding these fashionpreneurs?

Getty

Getty

One way is through Fashinvest, a three year old company that acts as a resource for connecting fashion entrepreneurs to investors. The company was founded by Karen Griffith Gryga and David Freschman, who collectively have over 25 years of experience within the investment world and realized there had been no such avenue. We spoke with Paul Fioravanti, director of operations at Fashinvest, who told us he gets emails every day from entrepreneurs talking about their companies--as well as investors wanting to know what’s out there.

Regarding what investors are looking for in a startup, he said, “They’re looking for the value proposition that the company offers them--if it’s a valuable entry into the market with limited barriers of entry with little competition and what a lot of people like to call a company’s 'special sauce' or 'secret sauce'--that differentiating factor.”

Of course, a good idea has little value without a plan, an experienced team, and maybe a little help from Fashinvest. “Investors won’t invest in a concept; they want to make sure things are in place and that their investment is sound,” Fioravanti said.

It can also be tricky for investors and fashion entrepreneurs--who typically come from different worlds--to understand each other. "It’s hard with fashion because it’s so creative and the creatives tend to be like, 'You know, this‘ll work and just trust me; this is a great idea; this is something that fashion needs,'" Fioravanti said. "That doesn’t really work with investors." Then, you have investors who aren't necessarily in tune with the interests of the 18-35 year olds these start ups are targeting. "That's one of the key elements that I bring to the company specifically is really trying to be that liaison and to say, ‘This is a great idea.'"

The amount of money a startup can raise depends on what stage it’s in. A brand new startup will usually get a smaller-scale seed investment of $250,000-$1 million to start the companies. According to Fioravanti, these have been the most popular types of investments lately.

In the experience of Fab's Jason Goldberg and Bradford Shellhammer, getting first round capital was pretty easy. “Even before we launched, we had people banging on our door wanting to give us millions of dollars,” Shellhammer said matter-of-factly. Goldberg's prior experience as a serial entrepreneur was one advantage. “People are more inclined to take a meeting and write a check to people who have proven themselves in the past, so his kind of success stories really helped us.” They also made sure to "convince people that we were going to get shit done.”

Shellhammer insists it’s not necessarily that hard with investors racing to snatch up the next big thing. “If you’re doing something interesting in the technology space, chances are someone’s going to call you.”

According to Fioravanti, investors are particularly eager to invest in ecommerce sites. In fact, investment amounts for ecommerce companies doubled from 2010 to 2011. Why? “The amount of sales represented through ecommerce in fashion is really only 9% so that leaves such a gigantic margin. That’s one thing thats’ really attractive to investors is being able to get into a space that is wide open and has a huge amount of possibilities in terms of getting revenue and earning money.”

In December, once Fab started breaking sales records, they raised another $40 million. “Once you’re successful it’s really easy to raise money.” Wright, who has studied the subject extensively, says you’re only going to see multimillion dollar investments in established companies with enough users and uniques that a valuation can be made. “So in a few years they can be sold. That’s why you can see people investing in fashion startups.”

What we know unequivocally is that the momentum fashion startups are having--and this phenomenon of fashion, technology and finance coming together--won't be slowing down in 2012. There are several new companies poised to invade our daily lives and change the way we experience fashion. Stay tuned for our list of ones to watch.