Reflecting on where the investment dollars have gone since the financial crisis, across a broad spectrum of investors, a surprisingly small portion has been directed towards supporting designer-led brands. This is in part due to the continued investor unease with the broader retail landscape, especially department stores and mall-based retail. In search of growth and defensible strategic moats, investors have redirected dollars to technology-enabled brands, direct-to-consumer models and fast-moving consumer goods, such as beauty.
Given this backdrop, the key question for a designer-led brand is: what are the options to raise capital and grow your business?
The good news is that there are multiple pockets of capital to consider. It’s important to think about investment in stages. You don’t have to secure all the funding you will ever need all at once. A good rule of thumb is to raise only as much as you need to reach your next big strategic milestone, whatever you set it to be. Then, reassess your capital needs. Your capital needs and the types of investors that you bring along your journey will evolve as your business grows.
If you are just starting out, a “friends and family” round is usually the first step. These are people who truly believe in you as an entrepreneur and share the vision you are building. The investment can come in the form of a loan or you can give up some equity in your company, usually a small portion. Participating in competitions and receiving prize money is another way to gain credibility and secure additional non-dilutive funding.
As you move past the proof-of-concept stage, it’s crucial to continue building a network of individuals who have invested in similar businesses and who are passionate about your brand. These individuals often provide the next stage of funding in a seed or angel round. At this point, besides just securing funds to grow your business, you should ask – does this investor bring value beyond capital? Do they have relationships or operating knowledge that can help me achieve my next milestone? Are they are good fit from a personality standpoint? Not all capital is created equal.
As you continue to grow your brand, build a stellar team and establish a solid operating track record, the pool of investors will widen. Family offices, private equity or investment funds of individuals who have built successful fashion businesses are all potential sources. These types of investors often bring more to the table than just capital. They will often have a network of partners and industry veterans who have the operational expertise to advise on specific business strategies. These investors may also bring strong relationships with buyers, retailers, and suppliers. Typically, they have an in-depth understanding of the complexities in the industry and can help navigate its unique challenges.
Beyond equity investments, there are multiple products on the debt side to consider as well. Besides factoring and getting a line of credit from your bank to fund working capital needs, there are debt investors who can also offer financing to grow your business. If you have positive cash flows and the operational stability to service your debt, it may be an attractive source of funding as you typically don’t need to give up equity in your business. For example, firms like Assembled Brands have provided a variety of credit products to design-driven and direct-to-consumer brands to help scale inventory purchases and marketing spend.
Are debt and equity investments mutually exclusive? Not necessarily. As long as you are able to comfortably service your debt and continue to show a positive growth trajectory, having debt on your balance sheet should not deter future equity investments. Besides straight debt or equity there are other instruments such as convertible notes and SAFEs that offer alternative options. Bottom line, the form of capital you seek must fit your business model and growth needs.
Don’t forget, there are ways to scale your business without outside capital. Many designer-led brands successfully grow by using the cash that the business generates. If you choose to raise funds, make sure you understand precisely why you are raising and have a plan in place for how the proceeds will be used. A purposeful and disciplined use of funds will often help to propel your business to the next stage. It also helps you to build trust and goodwill with your investors so that they are more likely to continue supporting you going forward in additional funding rounds.
As you continue to refine your pitch and meet investors, remember that investment decisions are often made over a period of time and based on the relationship that you build with a particular investor. Rarely will you be handed a term sheet at the end of your pitch. Just as investors will take the time to diligence your business, you should also take the time get to know them. Even if a term sheet is highly attractive, don’t forget that it’s often the alignment in values, vision, and personality that lead to a productive and sustainable relationship with your investor.
