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4/21/2014

The Basics | Part 3 How do I Find the Right Investors and Partners? - BoF - The Business of Fashion

INTELLIG ENCE | MARK ET P ULSE | TH E BASICS

The Basics | Part 3 How do I Find the


Right Investors and Partners?
BYIMRANAMED8JUNE,2007

Source:Shutterstock
Taking on financing is one of the most important decisions an emerging
fashion company will make. This step is absolutely essential because the
early stages of growth often requires significant amounts of working capital
that cannot be generated by the business alone. So, unless you are
independently wealthy and sitting on a pile of cash, financing decisions will
be part of your critical path, early on.
Whatisthedifferencebetweenequityanddebt?
Financing can come in many forms, but it basically comes down to equity
versus debt.

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The Basics | Part 3 How do I Find the Right Investors and Partners? - BoF - The Business of Fashion

Equity investors (in this case, venture capitalists or angels) provide cash to
invest in your company and therefore end up sharing ownership of the
company with you. They invest in the hopes that your business will grow
and that they will have some positive return through shared profits and
upside. They may offer you resources and expertise to help drive the
business further. In fact, this is much preferred to someone just giving you
cash and leaving you to fend for yourself. If, however, you disagree
fundamentally with your investor on where you want to take the company
and how you will do it, then you may find their help a nuisance. Thus,
when evaluating equity investors, choose someone who is aligned with your
strategy and who has the industry and/or functional experience that your
business needs to grow.
Debt financing, on the other hand, usually comes in the form of loans,
where you are required to pay back the money you have borrowed, plus
interest, using a fixed schedule of payments that can be spread out over
many years. While debt providers wont be actively involved in your day to
day business, taking on debt will mean you will have an additional cash
outflow that your business will have to be able to support each month to
stay on good terms with your bank. If payments arent made regularly, you
may quickly find yourself dealing with irate calls from your bank manager.
In the worst case, taking on too much debt could drive your business into
bankruptcy. Debtors are always paid back before profits are shared amonst
the shareholders of your company.
The good news is that with your business plan in hand, you are in a good
position to share your vision with potential financiers to sift through the
various options and make the best decision for your company. Financiers
may have advice to offer, and you should take this under consideration.
But, keep in mind the need to stay true to what you originally set out to
create. It is important that you believe in the strategy you pursue.
Whatlegalprecautionsdoyouneedtotake?
Before sharing the nitty-gritty details of your company with anyone, you
should request that they sign an NDA, or non-disclosure agreement, which
legally restricts the other party from sharing your confidential company
information with anyone else. Of course, you cant control what they
actually tell other people, but this is a good way of sending a message that
you take your business seriously, and that there is value that needs to be
protected. Often, NDAs are reciprocal, so both parties are protected. Your

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The Basics | Part 3 How do I Find the Right Investors and Partners? - BoF - The Business of Fashion

lawyer will very likely have a template that you can use, with some small
adjustments so that it is fit for purpose. It is customary to offer two copies
for the other party to sign, so that they can also keep a copy for their files.
Eventually, you may also need legal advice to ensure your interests are
being protected in any subsequent financing arrangement that arises.
Whataretheequityanddebtoptionsavailabletoyou?
1) Venturecapital VC funds look for high-potential businesses with
strong prospects for growth, often based on a core new technology or
brand.
Many VC companies dont even consider fashion as a core industry for
investment, as it is a notoriously fickle place with all sorts of fashion risk.
However, as the world has been awash investment capital lately and as the
competition for traditional investment opportunities has increased, more
people seem to seeing a gap in the market for investing in fashion. Initially,
the money was targeted at larger investments that have seen the likes of Jil
Sander, Helmut Lang, Jimmy Choo and most recently, Valentino, take on
private equity. But now, new funds are being raised in London, New York
and Paris to focus on earlier stage businesses:
TheAtelierFund- Richemont has backed the Atelier Fund to invest in
early-stage fashion businesses, spearheaded by Dawn Mello, former
President of Bergdorf Goodman. The first investments made were in
adampluseve, Mathew Mellon, and Mary Norton.
TowerbrookPartners Robert Bensoussan, formerly CEO of Jimmy
Choo is raising a fund with Towerbrook Partners to invest in fashion
businesses with sales of $30m not quite start-up revenues, but still
earlier stage than previously seen in private equity.
MarvinTraubAssociates- Marvin Traub Associates, the New-York
based luxury business consultancy, has stated in Womens Wear Daily
that it is toying with the idea of raising investment capital for emerging
designer businesses to pair with its business expertise.
TheCentreforFashionEnterprise- With the support of Harold
Tillman, Chairman of Jaeger, The Centre for Fashion Enterprise in
London is trying to raise a fund of 5m to invest in early stage fashion
businesses. The CFE is a government-funded body that, up until now,
only provided small investments of 20-40k.
TrapeziaCapitalIn the UK, there is also a venture capital fund

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called Trapezia Capital that focuses on business started up by women


entrepreneurs.
Withallofthatsaid,venturecapitalfirms,eventheonesthatarefocusing
onearlystagebusinesses,willoftennotconsideranyinvestmentuntilthe
businesshasaprovenconcepte.g.salesinexcessof$5m,acompelling
retailconcept,andthepotentialformultipleproductlines,etc.
2) Angelinvestors- If youre looking to raise capital for a pure start-up
businesses, Angel investors could be your best bet. Angels are
independently wealthy individuals, often with backgrounds in
entrepreneurship and business themselves. While the name might make
them seem truly heavenly, angel investors can sometimes be anything but
divine and this route needs to pursued with caution. Just finding angel
investors (let alone convincing them to invest) can be tough.
The best thing to do is ask friends and family if they know people who
might be looking to invest some cash. This will not only help you find
angels, it also comes with a built-in personal reference from the person who
puts you in touch. There are also networks of angel investors, like Pi
Capital, The Go Big Network and The Angel Investor Network, which help
to bring angels and entrepreneurs together.
When dealing with angels, it is mportant to ensure that there are clear roles
defined before any investment has taken place. It is not rare to see angel
investors, with the best of intentions, wreak havoc because they think they
are fashion experts and end up interfering in the business. Make sure you
agree what they will and will not be involved with based on a clear
assessment of their skill set. Make sure you are confident you can jointly
make business decisions with them. Test their response to pushback. It is
better to know exactly what you are getting in advance, than taking the
money and having to struggle later on.
Guy Kawasaki has some great lessons on raising angel capital on his blog,
How to Change the World.
3) Banks- Bank loans are possibly the most readily available source of
funding for young start-ups.a bank loan usually comes down to:
the quality (and length) of the relationship you have with your bank
and bank manager

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the future prospects for your business


the debt burden you are already carrying
Essentially, banks want to be confident you will be able to pay them back.
While all banks have credit guidelines to assess this, the process is not as
scientific as it might seem. A good relationship can go a long way.
Since you wont have much in the form of collateral to offer the bank in
return for your loan, the amount the bank can give you may be relatively
small compared to your overall funding need. Therefore, a bank loan
strategy may not be sustainable over the longer term as it requires
constantly going back to your bank and offers no guarantees that future
loans will come through.
Finally, keep in mind that loans also add another cash outflow to your
business. To reflect this in your plans, use your cash flow statement to
establish your funding gap for the next 1-2 years, and add in the loan
payments that you will have to make each month to learn how taking on
the loan will impact your monthly inflows and outflows of cash.
4) Factors Factors provide capital to businesses based on the actual
orders they have received on a season by season basis. This is very useful in
the fashion business as it can help to finance production for sales orders
that have just been completed. Once you hand over your order book to the
factors, they will take a cut of the total value themselves, and in return
provide you with the cash up fron while they take on the risk of collecting
payments later when the goods are delivered. Factors may choose not to
underwrite certain stockists which are too small or have bad credit records.
One of the leading factors in the US is Hildun. Working with factors means
giving away part of your revenues to the factor right from the start.
Whereelsecanyoulookformoreinformation
For more information on financing your fashion start-up, some general
lessons can be learned from the US Small Business Adminstration website
and from this case study.

Nexttime:HowdoIdecidewheretoallocatemycapital?

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The Basics | Part 3 How do I Find the Right Investors and Partners? - BoF - The Business of Fashion

Once you have successfully raised your capital, you will need to think
carefully about how to allocate this capital across various business needs
that you have identified in your plan. You may not have raised all the
money you need, so carefully prioritising key areas is important.
This is the third in a series of articles on the Business of Fashion: Basics
Basics 1 Setting up your own fashion business what do I need to know
first?
Basics 2 What is a business plan for and how do I go about writing it?
Basics 3 How do I find the right investors and partners?
Basics 4 How do I decide where to allocate my capital?
Basics 5 Design and development
Basics 6 Sales
Basics 7 Production
Basics 8 Marketing
Basics 9 E-Commerce

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