Adam Winters, the CEO of Merchant Financial Group, has spent the last two decades watching retail evolve as old and new guards compete. From his purview, it’s close to reaching equilibrium.
“Selling online, and balancing that with traditional retail, will be the way forward,” he said.
Winters’ company provides financing and lines of credit to small and startup consumer businesses, including Marchesa, Zac Posen, La Ligne and Bombas. He’s also an investor and strategic adviser to M3 Ventures, a venture capital firm that has invested in companies like Grana and Willing Beauty.
Dealing in the financials of both wholesale brands that are adapting to new consumer behavior, and new direct-to-consumer startups that are trying to scale and survive, provides insight on two sides of the same coin. We spoke to Winters about his perspective on how two distinct forces of the fashion retail market need to operate to move forward.
The businesses you finance often aren’t profitable and are actively losing money. How do you know they’re worth the risk?
Many consumer companies, especially as they’re growing, don’t attain profitability right away. They’re reinvesting every dollar they have into growth. So that at the end of the day, their financial statement would show they’re losing money. We understand that when you’re growing a business, you’re investing in growth and you’re going to lose money. We’re comfortable with that, as long as we’re comfortable with management, and comfortable that the company has enough cash to continue in business, and perhaps they have a good investor group that will continue to support the company as it’s ramping up. There has to be a plan in place to reach profitability.
So what factors make you confident that profitability is possible?
First and foremost, we look at the people. Who would we be doing business with? So much of it, for us, is about the people. If we’re going to look beyond the financial statement and beyond the fact that they’re losing money, we want to feel like the integrity of the founders is at the highest level.
After that, we look at projections, capital structure, the quality of investors and the quality of customers. Are they selling at top-tier department stores, or are they selling to partners that maybe are buying from sources who are just happy to get an order in? Overall, we want to make sure we’re putting out money in viable businesses, so we look for warning signs.
What would some warning signs be?
The companies that have a war chest of money, because they’ve gotten great investment and are willing to blow that money for top-line growth. It doesn’t mean they have a sustainable business model; it means they’re advertising so much, and they’re acquiring so many customers at any expense. But maybe the product, quality or design isn’t great. You could start a company in any category, and if you put $50 million behind it, you’ll have some nice revenue growth. But if you don’t have nice product? Guess what: You’re going to lose the $50 million and be out of business in a few years.
Do you think that consumer startups, especially in fashion, have gotten too fundraising-happy?
We do see companies that have tremendous investment that have lost tens of millions of dollars, and they don’t have a game plan to get to profitability because they don’t care. What they care about is the next valuation — will it be higher than the previous? — and what their exit strategy is. That’s all well and good, but the economy is cyclical. If they should enter into a downturn, then there may not be a Series C or D.
So we want to deal with people who can balance growth and spend in respect to customer acquisition, with keeping overhead in line. It’s great to have a bigger valuation, but it shouldn’t be at the expense of the business. We want a company to have a sustainable business model, where there’s an action plan to get to profitability. If they’re not talking that language, then most likely, we’re not interested.
What does this mean for wholesale brands that were around before DTC fashion brands began raising money?
It’s twofold. The less you need to rely on outside partners, the better, which is why the DTC model makes a whole lot of sense. Traditionally, if you started a brand with $1 million, you’re up and running, but you can’t get the word out there. No one knows you. So you sell to Neiman Marcus, and who has the leverage? You need them more than they need you, and they know that. That’s changed now, where brands don’t have to be beholden to retailers. DTC brands can raise awareness for a few years, and so when they do partner with a Neiman Marcus, they have more leverage — the deals are on their terms.
So, older brands should be spending money on social media, PR, advertising. Customers are influenced today differently than in years past, and a mature brand can reinvent itself through social media and marketing.
You make this all sound relatively simple: Build brand awareness; make good retail decisions. Surely it isn’t.
“The death of retail” is overblown. “We’ll make it rich by building a brand and selling online” is also overblown. There has to be a balance. People are shopping in stores, but the way you market to customers is different. It’s relatively easy to acquire a customer, but it’s not easy to keep them. If you don’t have a good underlying business, it’s never going to stick.
It’s about finding the companies that, at the end of the day, have a good business. That’s it, plain and simple. If they’re just spending, spending, spending, and we’re not comfortable with the business, then we’re just fooling ourselves, and the company’s fooling themselves, and it won’t end well.