The multi-trillion dollar fashion business is ripe for disruption and venture capitalists who seize the opportunity will see huge returns, argues Jay Deng.
Shopper carrying bags | Source: Reuters
NEW YORK, United States — Software as a service (SaaS), enterprise and mobile all have one thing in common: they are the bread and butter of most venture capital firms and angel investors. You would be hard pressed to find a VC who doesn’t have a portfolio dominated by tech start-ups.
But as the global economy evolves, we are beginning to see disruptions in areas that were once ignored. However, there is still one industry that has yet to go mainstream with investors: fashion.
It’s no surprise that fashion isn’t really on the radar of most traditional Silicon Valley investors — VCs aren’t exactly known for their knowledge of fashion and most see the industry as gaudy, over the top and a domain reserved only for women.
But as a former fashion designer turned venture capitalist, I see dollar signs — and lots of them. Let’s take a quick look at the numbers: a $1.2 trillion market size, expected to grow to $2 trillion by 2018. To put that into perspective, the global SaaS market is around $20 billion. Cloud services is $131 billion. And enterprise software is $120 billion.
Overall, the fashion and apparel industry is a juggernaut and it’s easy to see why: everyone needs clothing and it’s a product that we use every day. And that’s the beauty of fashion and why it holds untapped potential for VCs; it’s the perfect combination of market size, unending global demand and an industry that has yet to be fully disrupted. Indeed, there are still many problems that need to be solved in the fashion industry and the payout for solving them will be significant.
It’s no surprise that people want to look good for less. Companies like Fab are trying to solve this problem, but I believe they and many others are only beginning to scratch the surface. Subscription boxes like StyleMint and Popbasic will continue to be popular, but there is still room for innovation when it comes to affordable fashion. I also see a future where crowdsourced apparel will become mainstream.
One of the most vexing problems that retailers continue to face is knowing what to buy and stock on their shelves. Unsold inventory costs retailers billions of dollars a year and only now are we beginning to see startups like Editd take a big data approach to solving this problem. With millions of retail stores around the world, a big data solution to fashion inventory can become a very lucrative market.
How can we make the best quality clothing while maintaining good profit margins? Companies like Nike and Lululemon have long struggled to balance both, while trying to maintain a positive image of their overseas factory workers.
Makers Row is one startup trying to bridge that gap and although their solution is not perfect, it’s a start. As demand for high quality and domestically made apparel rises, it will give way to more start-ups like Makers Row who are trying to solve this problem using SaaS and other technologies.
Nowadays, being “metrosexual” is no longer frowned upon. Men have a strong desire to dress well and we are beginning to see start-ups like Frank & Oak take on this burgeoning part of the fashion market.
Start-ups like ThreadFlip will play a significant role in the industry. We’ve already seen how the “sharing economy” model can be successfully applied to fashion — just look at Rent the Runway.
And, believe it or not, there are billions of dollars worth of unused clothing just sitting in women’s closets and finding a way to monetise that will be incredibly profitable. In fact, I predict that the next big fashion start-ups will tackle this problem head on and those who succeed will be richly rewarded.
Only 10 percent of clothing is purchased online and there is a good reason for that: fit.
EBay recently acquired PhiSix Fashion Labs, which has come up with a technology that creates 3D models of clothing from photos. Now online shoppers can see exactly how something will fit no matter what the item is. And they aren’t the only ones trying to solve the problem — an influx of other start-ups are coming up with unique and innovative technologies to help online shoppers find the perfect fit and reduce returns for online retailers. The acquisition market for these types of start-ups will be significant and eBay’s purchase of PhiSix is a good sign of things to come.
The good news is, most major VC firms have at least one fashion start-up in their portfolio and companies like BirchBox, Frank & Oak, Fab and Zulily have all proven to be lucrative investments. We are also seeing more specialisation in fashion with venture firms like Forerunner Ventures and Burch Creative Capital, and accelerators like TrueStart and New York Fashion Tech Lab focused mainly on fashion and retail start-ups.
In the end, fashion and apparel is a multi-trillion dollar market that should not be ignored by Silicon Valley. It is ripe for disruption and those who fund start-ups that provide successful solutions to the problems above will see huge returns.
As for traditional VC firms, if you are wise enough to see the huge potential in fashion, you will starting looking for your next hires, not at Stanford, but in the fashion industry.
Jay Deng is an angel investor and venture capitalist based in New York. He is also the founder and CEO of Diva For Less.
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