When fashion was in the grips of its growth-at-all-costs era, investors were backing buzz and brands were blowing up — but bottom lines weren’t. Now, in the midst of a subdued market, investors are being more selective, and the new playbook for funding fashion has a lot to do with the quality of that growth, the depth of connection with customers and the founder’s individual appeal.
“Investors have not lost their appetite for fashion; they have become much more discerning about the businesses they are prepared to back,” says Lorna Hopkinson, M&A managing director in the retail and consumer team at business advisory firm BDO. “There is still an appetite for good transactions, but the gap between strong and weaker businesses has become more pronounced.”
That’s largely owed to a reality that there’s too much competition in fashion, too much inventory and too many markdowns, says John Kernan, a seasoned retail market analyst and former managing director at TD Cowen, speaking in an independent capacity.
“The structural competitive dynamics have really changed,” Kernan says. “Brands that can sell through at full price, and consistently innovate on top of that, or gain share, are the ones that will see investment.”
The market isn’t the same as it was in 2021 when capital was flowing. Consumers were spending on fashion and luxury to entertain themselves mid-pandemic, and investors were willing to spend big on brands that promised even bigger growth. But when the economics changed a couple of years later, and inflation met weakened consumer spending, the market grew sluggish and so did fashion M&A. Investors shifted from easily backing a business that had the potential to hit a $100 million valuation because the market opportunity was $5 billion, to asking a harder question: what kind of growth is actually worth paying for?
The new playbook
In July, Never Fully Dressed, the womenswear brand founded by Lucy Aylen, sold a majority stake in its business to Refined Capital Partners, and the deal is expected to help the company continue to grow while staying true to itself.
So what was it about this particular business at this particular time that drew capital-backed interest?
Ultimately, it comes down to what investors are looking for right now: genuine differentiation, says Hopkinson, who advised Never Fully Dressed on the investment. “Standard, average, generic direct-to-consumer fashion brands just don’t cut it anymore. You need to have true authenticity as a brand, a real, unique reason to exist and a real purpose, and I think Never Fully Dressed has all of those in spades.”
It also had the numbers to support a future success story. Revenue, gross profit and EBITDA are still the typical financials investors focus on, but many are now moving past a fixation on daily sales in favor of underlying profitability. Revenue by channel and margin by channel are also key metrics in determining exactly where the business is making money. Customer acquisition cost (CAC), lifetime value (LTV), and whether a brand is actually selling the customer what they want are also critical.
“If they’ve come for a dress, do they want to buy a cardigan? Will that customer always just buy dresses? Does she want a dress every month?” are some of the questions she advises fashion brands to find answers to. “A lot of the businesses that we see have decent LTV figures, but they’re growing so quickly they probably haven’t leveraged their own internal client bases.”
In some cases, they may not have leveraged their own founder. While Never Fully Dressed ticked the typical investment-worthy boxes, Aylen also positioned herself as both a visionary — and visible — founder, something that mattered less in this landscape five years ago. “We have all become obsessed with people’s lives and obsessed with micro videos and content. We all want to see Lucy Aylen’s Instagram. She looks incredible, but she’s also engaging. You can see her real personality, so people are watching that and thinking, ‘I want to be her, I want to look like her,” Hopkinson says. “Founders with authenticity are much more likely to drive investment than bland, bogged down, standard brands that have no unique DNA.”
