– Diligent fashion industry investors expect to see more uninspiring exits in 2024 following a string of fire sales last year.
– However, a more promising economic outlook in 2024 replicates likely renewed interest from venture capital investors and opportunities for lucrative exits for-profit start-ups.
For fashion industry start-ups, the year 2024 may herald a return to cash flow as the turbulent direct-to-consumer (DTC) landscape gets relatively steadier. Late-stage, profitable start-ups such as True Classic are beginning to search for buyers ahead of an anticipated better economy.
True Classic, a men’s fashion brand, has hired investment bank Moelis to compile a pitch deck for potential acquirers. The firm, which enjoyed a 40% YoY sales increase to $207m against the backdrop of a shaky economy in 2023, is aiming for a $1bn valuation. The decision is a bold departure from the tenuous economic climate and high inflation of last year which ushered a financial reckoning.
Fashion start-ups and retailers struggled to secure new funding as interest rates peaked in the late 2020s. Despite Naykid introduction in the unknown, with the sale in August wiping out the equity for shareholders, other companies collapsed with financial woes. While Farfetch was able to attract a bailout loan amounting to $500m from South Korean company Coupang, other struggling brands such as fellow competitor Matches just missed bankruptcy.
Despite such obstacles, investors are predicting another wave of fire sales and increasingly bankruptcies in 2024. In fact, the likes of activewear retailer Bandier are openly searching for buyers to avoid bankruptcy. Nevertheless, an improving economy suggests more funds for fashion brands, with some of the sector’s largest names rumoured to pursue initial public offerings.
However, concerns are arising over whether these conditions can outrightly clear the way for a bevy of new acquisition, funding, and initial public offering opportunities. Although a return to valuations witnessed in 2021 seems improbable, 2024 may see less grim news. Start-ups that are already profitable, including True Classic, are relatively well-positioned to explore new avenues in the marketplace.
Despite the seeming positivity in the sector, investors are advised to focus on brands demonstrating a clear path to profitability. Brands that can incur reasonable return on initial investments such as retail partnerships, and have played by the rules of the first wave of fashion brands are the most attractive at this stage.
For instance, fragrance brand Snif, which launched in 2022, was able to secure an undisclosed sum in early 2023, previously considered a dry period for investments in consumer brands. This was a product of its alliance with Ulta Beauty, a move that comfortably doubled sales to above $10m. The achievement prompted an early Series A funding round to fund new plans. Expected to boost the brand, the move is emblematic of prospects that path to profitability presents, investors believe.
Investors are expecting better terms in 2024 for more mature start-ups seeking an exit. The ball appears to be more in their court so long as they can meet rigorous set expectations, such as having numbers that are up to par. Brands such as accessories firm Dagne Dover have discussion with acquirers and bankers before, whether to establish relationships, according to its Co-founder & CEO Melissa Mash.
Dagne Dover expects a valuation that is even worth seven times its revenue, based on exits at similarly-sized beauty brands it hopes to resume talks this summer. Some firms are eyeing other strategic options beyond an outright sale. For instance, custom-made apparel brand Knot Standard that noted $15m in annual sales and broke even for the first time explore among other prospects, strategic partnerships when it hired Maybank.
Ultimately, set specifications such as having the necessary financials can influence such decisions leading fashion brands selectively.
Dagne Dover among them expects an acquirer that can help multiply its sales by 10x, however, it does not want to go into a deal that would disrupt the company’s culture. The same applies to True Classic. Despite its commitment to an exit plan during a previously harsh economic climate, its Co-founder & CEO Ryan Bartlett does not feel rushed and is not set on an exit for the sake of it.
If the preferred valuation and desired terms are unattainable, True Classic is prepared to hold off the exit plans. The founders are keen on keeping their existing team. Bartlett explains “We’re not in a rush…It’s really got to be the right partner…It’s not just about the right check”.
