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Why Young Designers Struggle to Find Investors

For the vast majority of labels, investors don't come knocking until business is truly booming. Here's how emerging brands make it work in the meantime.
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With a growing number of prizes becoming available to young designers today, emerging labels in many ways have more access to funding than ever before. But for the vast majority of new brands, capital is still the biggest bottleneck to getting a line off the ground, and despite what buzzy headlines about conglomerate investments in labels like Altuzarra might suggest, access to investor dollars is still scarce.

Over in Silicon Alley, just a few blocks south of New York's Garment District, tech startups get million-dollar investment deals all the time, before they've even made a cent on their product. Just last week, The Hunt raised a $10 million round of financing. For its team, figuring out the right way to monetize is an upcoming project.

So why are young fashion brands such a hard sell to investors? Tech investors are in part looking for new ideas, and novelty is easily gauged with enough market research. Fashion, meanwhile, is fickle and subjective. Brands strike a chord with editors and consumers for intangible reasons, emotionally driven. Yes, the quality has to be impeccable, but style and viewpoint are something of an x-factor. As Steven Kolb, CEO of the CFDA, explains it, "There's newness and creativity in fashion, but it's not a new business idea." And just because a designer's first collection piques the industry's interest, doesn't mean he or she will be able to hold its attention.

Investors beyond friends and family only come knocking when a designer has managed to grow his or her brand to a "10, 15, 20, 25 million dollar business," Kolb says. Kering only recently took a minority stake in Altuzarra — after the designer had been in business for five years, won a multitude of awards including the CFDA/Vogue Fashion Fund and widely gained the industry's respect. That may be an extreme example — fashion conglomerates like Kering and LVMH are particularly choosy about who they associate with — but it illustrates the point: It takes time and proof that they'll be getting a return on their investment.

"The real challenge is for the designer to be patient, to have a steady growth plan, not to think too big, to be focused, to be cost-conscious," Kolb says.

"We have tried to reach out to investors, and I've talked to a couple of potential partners and the feedback we got was we needed to show very strong revenue and cash projections," says Mei Liu, the designer of Priory of Ten, a two-year-old brand based in New York. Proving her brand's longevity is difficult to do, Liu says, partly because the womenswear market is so saturated and partly because of the cyclical, seasonal nature of its cash flow.

Outdoor Voices, an online native brand that sits at the crossroads between activewear and T by Alexander Wang-style street wear, initially sought venture capital funding from investors that typically work with tech companies in the hope of raising a sizable round and entering the market in a big way. 

Those firms proved too hard a sell, says founder Tyler Haney, their main piece of feedback being that Outdoor Voices's valuation was too high for a fashion company. So the team scaled back its plans, accepted that it was going to take a more bootstrapped approach to the label's launch and reached out to angel investors in the cities that showed the largest sales volume. Outdoor Voices ended up bringing on more investors, about six of them, for smaller pieces of the company.

In adopting a more independent mindset, Outdoor Voices has focused on growing its customer base while maintaining an iron grip on its cash flow. The unanimous agreement from those interviewed for this article was that good cash flow comes in no small part building a trusting relationship with manufacturers. Over time a factory will allow a designer to negotiate the timing of his or her payments, which is important given that a seasonal collection will be produced months before it sees any return in the form of sales. 

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Outdoor Voices only works with one factory, a relationship that Haney describes as "hugely important." It's getting to the point where the company doesn't have to pay for the clothing until it is ready to sell, but when it was smaller, it had to pay for materials and manufacturing up front -- two full months before the product went to market.

Liu says that designers can get into trouble when a production partner refuses to ship before the payment comes in. On a tight budget, it takes time to get that cash ready, and not having it can delay deliveries. She's experienced that with Priory before and takes care to manage the company's finances such that it has a cushion to ease that seasonal gap. 

For a well-known company with a good industry reputation that's operating at a high volume, it can be relatively easy to get a credit account with a manufacturer right off the bat. Small companies are riskier, so they have to build up a producer's trust before they can negotiate the timing of their payments or get samples made for free. Honesty, above all else, is the best policy.

"When I see a delay in payment, I let them know right away," Liu says. "As soon as you don't make that payment, or take three months to make one payment, that's going to remove the trust and prolong the amount of time that you can establish [credibility]."

The London-based designer Steven Tai says that there are some banks and fashion funds that will give loans out if a designer receives an order from a reputable retailer. They'll give the money up front so that a designer has the resources to produce their collection and get it into the store. Tai is also luckier than most on the production front: His family works in manufacturing.

For young designers working on a tight budget, ghost work for larger brands or one-off collaborations can provide additional sources of income, Kolb says. Tai worked at Stella McCartney as he was getting his brand off the ground. He won the Chloé award at the Hyères International Festival of Fashion and Photography in 2012 and has since been making that prize money stretch as far as it can go.

Liu works as a women's sportswear designer for Paper Denim Cloth for her day job, and her excess income goes toward Priory. If a payment is coming up and the company is short on cash, she'll front that outstanding bill for the sake of maintaining good manufacturer relationships.

At the end of the day, not taking on investors isn't always a bad thing. As Sally LaPointe told Fashionista back in February, individuals' and firms' desire to see a return on their investment can stifle creative freedom. 

"We were very lucky to have friends and family help us out, which is [a] great piece of advice that people have given us, too — that unless you need to go get an investor, don't. It's still 100 percent owned by us, so we don't have outside investors, which gives us a lot of freedom," LaPointe says.