Luxury Briefing: When it comes to fundraising, ‘everything outside of AI is contracting’

For brands trying to secure fundraising, many of the conversations with investors have proven difficult. On the one hand, it can be a good thing for the industry to support sustainable business models with clear profitability paths, rather than propping up unprofitable businesses for years with venture capital money. But on the other, some of fashion’s biggest new companies of the last decade may not have gotten off the ground without the safety net of VC funding.

Over the last two weeks, Glossy spoke with founders and executives from across the luxury sector about the state of fundraising and investments. Here’s what we heard.

The fundraising landscape

For Charles Gorra, founder and CEO of the luxury handbag resale company Rebag, it’s clear that the fundraising landscape today is very different than it was even two years ago, when Rebag raised $33 million.

“Something material has changed,” Gorra said. “It’s the impact of 6% interest rates. When you have those kinds of rates, long-duration equities [meaning an investment that potentially won’t see a return for many years] are affected.”

Gorra said that, for years, in a low interest rate environment, fashion startups pitched themselves as tech companies and would use emerging technologies to deliver amazing returns. Companies like Allbirds and Warby Parker, for example, had massive IPOs based on the success of an online-first approach. But now, those companies are struggling. Amid declining sales, Allbirds announced the closure of 10-15 of its 60 stores last week and the resignation of its CEO, Joey Zwillinger. Outdoor Voices also announced it would be shuttering all 16 of its stores, despite raising more than $50 million in funding just a few years ago.

“There have been issues with these companies that raised massive amounts of funding and then couldn’t live up to the expectations that came with it,” Gorra said. “There’s a question of whether VC returns are even possible anymore for a consumer brand.”

Gayle Tait, CEO of the resale company Trove, which facilitates resale for luxury brands including Canada Goose, said it’s probably “good hygiene” for the market to correct away from supporting fundamentally infeasible business models with lots of VC cash. But she also said that the era of easy fundraising allowed some businesses with long runways to profitability — like those in resale — to get off the ground even without immediate profits.

“Think of The RealReal or ThredUp — companies that took a while to begin to break even,” Tait said. “It took years for The RealReal to become profitable, but they did it. And they might not even be able to get off the ground if they were starting now.”

Frustrations with investors

Chris Gove, founder and creative director of the British menswear brand Percival, said he could especially see the shift in the VC mindset toward immediate returns and safe bets over the last year.

“The mandate for getting money four years ago was basically to just grow the bottom line. Get revenue now and figure out profitability later,” Gove said. “But in the last year, VCs have said to us, ‘If you had come to me a year ago, I would have showered you with money.’ VCs change their mandate often.”

Gove also lamented the often exhausting process of pitching VCs and investors. He said he’s been on calls with investors who show little understanding of the fashion industry and its products, and are actively disrespectful to brand founders. One investor simply cut Gove off halfway through his presentation.

Tait said, generally speaking, most of the investors she speaks with are more respectful than that. But she did mention her frustration with pitching investors who are clearly using the conversation as an educational opportunity.

“I’ve talked to people and they’ve said up front, ‘We’re not going to invest, but I want to learn more about resale from you,’” Tait said. “And it’s good they want to learn, but that’s an hour of my time I’d like to use talking to someone who might actually invest.”

Where do we go from here?

So what alternatives are there for brands looking to raise funds? Chris Gove at Percival turned to crowdfunding last month, offering customers the chance to invest money into the brand piecemeal in exchange for perks like permanent discounts and access to private events. Luxury resale platform Vestiaire Collective announced a similar crowdfunding effort in January, eventually raising more than a million dollars directly from its customers.

Luxury skiwear brand Perfect Moment took a different approach after it struggled to get VC investors to sign off on a funding round. The company staged a small IPO, raising only around $8 million from the public market. That’s far less than publicly traded companies typically go for, but enough for the humble expansion plans the brand had in mind last month when it went public.

And multiple founders serving as sources for this story half-jokingly mentioned another surefire way to get investor interest.

“It’s really hard to get investment right now,” Tait said. “Unless, of course, you mention AI during your pitch.”

AI companies are one of the few sectors still seeing the enormous valuations that were common a few years ago in the VC world. Hippocratic, a new healthcare startup that pushes AI, got a $500 million valuation this week following a $53 million funding round. And, as of this week, Saudi Arabia is reportedly creating a $40 billion fund to invest in AI startups around the world.

But the investment craze for AI may be shortlived, too. There are already reports that many of the companies that invested hundreds of millions in AI over the last two years have yet to see a positive revenue impact from its use.

“Everyone outside of AI is having a hard time fundraising,” Gorra said. “Everything outside of AI is contracting.”