When we interview designers about how they got their brands off the ground (which we do frequently), one of the most common things we hear is that it cost a lot more money than they ever anticipated — so much more that they might not have even started their brands had they known beforehand. And that's not just to launch, but also to keep the brand afloat.
While getting a big order from a major retailer might sound like a good thing for a fledgling brand, it means the brand has a short time to somehow produce that inventory and hire the necessary employees without any money upfront. Direct-to-consumer brands have their own financial challenges, having to come up with the funds for everything — inventory, an e-commerce platform, distribution, marketing and much more from the get-go. In the first few years, most brands lose money rather than turn a profit — it's why so many emerging brands shutter despite initial buzz. I've even heard of accountants advising designers not to start a fashion business if they or their families aren't independently wealthy.
There are, of course, options for those who aren't, all of which have their pros and cons. If you self-fund, assuming you can afford to do that, chances are your business is going to stay quite small, a prospect with which there is nothing inherently wrong. If you take money from another person or entity, you'll end up with some debt and/or giving up some control of your company.
We spoke with brand founders and lenders to outline the most common options designers have to fund their businesses in 2018, from tried-and-true methods like factoring, to newer models that reflect the industry's shift from wholesale to direct-to-consumer and omnichannel, and their advantages and disadvantages. Some of them go hand in hand, and if you're really looking for the best way to fund your business, we'd still suggest doing more research and talking to financial advisors. (Business of Fashion's paywalled Professional and Education verticals also have some useful resources, as does Investopedia). But, hopefully, this points you in the right direction or provides some background if you're a total fashion funding novice, which I basically was before I started researching this article!
Friends and Family
Brands often launch with a friends-and-family round, which is what it sounds like: people you know loaning you money or investing in the business so that you have enough money to, literally, get it off the ground. This method, of course, tends to allow more flexibility than others, but it's always important to let them know it may take some time before they'll get paid back.
With venture capital, an investor is providing money to a startup that they believe has long-term growth potential. For a more early-stage company, it could be an "angel investor," as in a high net-worth individual, or a venture capital firm who provides a "seed round" of funding. The dream for a venture capitalist is to get in while the company is small, and stay in until it sees exponential growth, like investing in Facebook when it first started.
In exchange for the funds, the investor is usually given equity in the company. For some, this is a deterrent as it typically means the investor has some control over the company and is involved in business decisions. In some cases, such as when the investor has experience in growing similar businesses, this can actually be beneficial. And for brands that want to reach their potential quickly, venture capital can majorly accelerate growth and help them scale. The relationship typically begins with the startup presenting investors with its business plan.
This has become a popular funding method for digitally-savvy direct-to-consumer brands such as Everlane, Outdoor Voices and Glossier who seem to raise mind-boggling amounts of money in short periods of time. An interesting example is Tamara Mellon, who came from a traditional "analog" accessories business, Jimmy Choo, and has used venture capital to quickly grow the namesake luxury footwear brand she launched in 2016 (after filing for Chapter 11), which is sold direct-to-consumer: That element that was crucial in getting support from lead investor New Enterprise Associates (NEA), which has invested in over 1,000 companies, including Warby Parker and Casper. "There's a shift happening in the way brands are being built today. Some investors understand that and have the conviction to get behind those businesses," Tamara Mellon CEO Jill Layfield tells me following a recent $24 million Series B round that brought the brand's total funding to $37 million. It's going toward hiring employees and expanding the assortment.
As for how they determined the amount of money they needed, Layfield says it's a "lot of time in Excel" laying out different scenarios for the business in terms of "who do we need to hire, how much inventory do we need to buy and what sort of capsules do we need to market." She adds that, "venture capitalists obviously look for big returns, but I think one thing that's fantastic about NEA is they understand how businesses scale and develop at different paces and they're very patient investors," meaning they're in it for the long haul, not looking for a quick exit.
A common and longstanding method of funding fashion brands is private equity, wherein a brand might sell a minority stake to a private equity firm. These brands are typically more established than one that would go after venture capital (and perhaps they already had), and they need financing to grow, but are not yet big enough for an IPO or interested in a full acquisition. Examples of recent private equity deals include General Atlantic taking a 45-percent stake in French contemporary label Sézane, Castanea Partners' minority stake in Proenza Schouler and Berkshire Partners' minority stake in Opening Ceremony. In these cases, the investor typically takes on a long-term, strategic role in fueling the brand's growth.
Whether from a person or a bank, taking a loan means having debt that you need to pay back with interest, most likely on an inflexible schedule. Debt can be burdensome for a small brand, but it also doesn't require one to give up any control of their business.
Factoring is very common, especially for brands that do wholesale. It's not an investment, but rather a method of financing that gives brands access to working capital. When a designer gets an order from, say, Nordstrom or Barneys, it typically has to produce and ship that order before it sees any money from said retailer; that's a pretty fast way to run out of money for a brand that isn't massively profitable or doesn't already have lots of funding. A factor — Hilldun and Merchant Financial Group are big ones in the industry — will look at the designer's orders, advance them around 80 percent of the order value once it ships and collect the money from the retailer directly; the client is paid the remaining 20 percent once the factor collects. A factor will also do a credit check on retailers before a client agrees to ship an order to ensure the retailer will actually be capable of paying; it also acts as a collection department if a retailer is past due. And if the retailer never pays — a problem that is becoming more common as brick-and-mortar stores shutter locations and declare bankruptcy — the factor acts as credit insurance and still has to pay the designer, per their agreement beforehand.
Oftentimes, factoring isn't a brand's only financing method, and could go hand-in-hand with something else, like venture capital or private equity. It is also done by a range of business sizes: Merchant Financial Group works with Zac Posen as well as La Ligne, which is more of a startup. For them, a typical contract is one to three years, while they've worked with some clients for more than 20. According to Adam Winters, President and CEO of Merchant Financial Group, it's a better option than bank financing, which can be restrictive and difficult to navigate; factoring offers a simpler on-boarding process and better understanding of the fashion business.
However, some now see factoring as a less relevant financing option as much of the industry shifts toward a direct-to-consumer business model, but lenders like Merchant Financial Group are trying to adapt: "Ten years ago, the startups or businesses, they were former employees of Donna Karan or Ralph Lauren; they raised a few hundred thousand dollars, put a line together, went to Coterie and based on that, they were in business or not and they were selling to traditional retailers," explains Winters. "Now, the prospective client comes to us with two Harvard MBAs; they have a CFO from a big accounting firm and sophisticated computer systems; they're going to sell direct-to-consumer and they're going to use half their capital in year one." And they don't need factoring, so, instead, Merchant can provide asset-based lending and lines of credit based on their inventory.
Side Hustles and Licensing Deals
Many designers will consult, collaborate with or work for another brand behind the scenes to make money while working to get their own off the ground. One well-known example is Laura Kim and Fernando Garcia: Before they got the Oscar de la Renta gig and after launching Monse, Kim designed for Carolina Herrera. Now, they both work on Oscar de la Renta in addition to running their own line, with the former undoubtedly bringing in more money than the latter.
Getting a licensing deal with, say, a makeup or eyewear company, can be a lucrative brand extension and not require too much work on the designer's part, but that requires a certain level of name recognition and success already.
Other designers might DJ, like Virgil Abloh, or take on some paid influencer posts if their following is strong enough and it's a brand that doesn't compete with their own.
The downside of any side gig is, naturally, that it takes away time and focus from your main business, or might dilute your brand if it's not well-aligned.
One of the newer methods of funding a clothing line is through online crowdfunding on platforms like Kickstarter, GoFundMe and SeedInvest that simply didn't exist a few years ago. With something like Kickstarter, you set up a page convincing people how amazing your product will be; people pledge money until you reach a predetermined goal that will allow you to produce your line or product and they're guaranteed something in return — usually the product itself. In that case, they're basically customers making a preorder. While apparel companies have raised as much $3.9 million on Kickstarter, they are not usually aesthetically-driven fashion brands in the traditional sense, and instead focus on specific products with some kind of unique innovation, like this crazy "travel jacket" with 25 special features.
Equity crowdfunding is even newer: Because of Regulation A+, which passed in June of 2015, anyone can now invest in a private company whereas previously, you had to be a venture capitalist or simply extremely wealthy. This made equity crowdfunding — i.e., allowing a large number of people to invest in your fairly small company in exchange for equity — possible and legal. It's like an IPO for a small, private company. In 2016, direct-to-consumer denim brand Dstld listed on SeedInvest and promoted itself as the first customer-funded fashion brand. "We tried to build a business without venture capital. We don't have a single large institutional investor who sits on our board and tells us what to do. We love the idea of keeping control and being able to build for the long haul," explains Co-Founder Mark Lynn, who initially launched with $5 million from friends and family and smaller venture funds, but wanted to find an alternative way to fuel growth.
After a "testing the waters" campaign to gauge public interest, DSTLD raised $1.7 million in equity crowdfunding. The benefit, aside from not relinquishing control to venture capitalists, has been engaging customers, who Lynn calls "evangelists" of the brand. "What a fun way to get behind a brand, to share it with people that you know, which lowers our marketing costs as a company which you're a shareholder in," says Lynn. There are several downsides, though: You can't predetermine the amount of money you'll raise and are essentially just taking what you can get; you're required to report financials to the SEC; and you have a large number of likely inexperienced investors with a lot of questions. "You need almost full-time investor relations," says Lynn. It's also still a very new concept, and Lynn is still figuring out how he'll be able to provide liquidity to his investors.
"It's just like everything in life," he says. "It's going to be three times as hard as you think it is and it's going to be half as much money."
Incubators, Contests and Holding Companies
There are a number of organizations and platforms set up to fund emerging brands, each with their own niches and sets of requirements and barriers to entry. There are contests with cash prizes, such as the CFDA/Vogue Fashion Fund and the LVMH Prize, for which the application process alone can be quite time-consuming — sometimes it's more than a small brand can take on while also running day-to-day operations. Incubators and accelerators, which exist all across the country, typically provide entrants with under $1 million in cash and a year or two of mentoring and other services. The idea is that once they leave, they'll be on the right path to make it (though that isn't necessarily always the case). The CFDA's famous incubator program recently pivoted to become a digital program, called "Network," that ostensibly provides all members with business mentorship and other resources including access to workshops and investors. Network was largely the result of industry shifts that meant all brand levels were struggling, not just up-and-comers.
Small American holding companies, conglomerates and manufacturing companies are also emerging under the premise that brands can run more efficiently and inexpensively when resources are pooled. Assembled Brands is an interesting amalgamation of a few different financing concepts. Under its umbrella are smart, digitally-savvy brands like Khaite, Pop & Suki and Margaux. The company acts as a strategic investor in each brand: With full access to their sales and financial information, it combines credit and equity to give them access to the capital they need while guiding them on how best to use it. With many of its brands being direct-to-consumer, it's sort of the modern answer to factoring. "There's a larger risk than in traditional factoring because you basically had to say, 'How likely is it that a store like Neiman Marcus or Bergdorf or Barneys will pay?' And now we have to say, 'How likely is it that these customers that brand X has will continue to come and will continue to buy this product, and how likely will cash continue to come into the business?'" explains JoBeth Abecassis, a third-generation lender who now acts as Director of Strategic Accounts at Assembled Brands.
In general, Abecassis advises brands to think about combining equity with debt. "[Debt] can give you access to a continuous flow of working capital to make sure you have enough goods to sell to your customers, and it can help you find the runway to continue to allow your business to grow while seeking equity investment," she says. "I think it's important for brands to think about the value of having a debt partner in that you're paying for money, but you're not giving up ownership."