Attention, brands, here's what investors are currently looking for

Recently FashionUnited sat down with Nikki Baird, VP of Strategy at Aptos, the retail enterprise solution provider, who was fresh from attending several retail conferences held during one packed week in Manhattan. Retail Brew’s annual summit, The SKU, featured industry leaders from Zappos, StockX, JCPenney, thredUp, Athletic Greens, Sam’s Club, Baked by Melissa, Curb, and Bolt, to name a few, while Axios hosted its inaugural dealmaker event, Axios BFD, with guests which included the CEO Neiman Marcus Group, co-head of mergers & acquisitions at J.P. Morgan, and the president of NYSE among others. Based on our conversation with Baird, we summarized five key points that independent businesses and start-ups looking for investment in this current environment should focus on.

Inflation buzzkill

"Investors are not as concerned about inflation as retailers,” says Baird. “They seem to feel the effects of inflation will resolve itself by spring of next year.” But from an investor perspective the market for IPO is going to be dry through 2023, and with interest rates at their current height financing is going to be much more challenging.

No more hero product

A striking contrast emerged between what investors are prioritizing versus what startups believe is their selling point. Start-ups that are digitally native, that have established their hero product and have in place all kinds of successful social media strategies, are still not going to attract capital. Investors do not want to acquire a company that is a one-hit wonder. At one time it was possible to attract funding if a brand appeared to have cornered the market in one product, say, the perfect jean, which was then photographed on all the top influencers. Those days are gone. “Investors want to see not just revenue growth but cost-effective growth,” says Baird.

Direct-to-consumer to wholesale

“There’s much more pressure on direct-to-consumer start-ups to focus on either acquiring a wholesale partner or opening stores or both. We work with a lot of brands which started out wholesale that then acquired a retail business or vice versa, but having both is more valuable than having only one or the other,” says Baird. Of course, for direct-to-consumer brands, getting a wholesale partner is risky if the brand is not scaled to support it. “Direct-to-consumer brands are running out of runway,” says Baird. “If you’ve got this one awesome product that sells like hot cakes online but then you land Macy’s as a retailer you’ve got to be in a lot of stores really fast. Investors want to see these brands open a few stores and build up some distribution so that it’s not so much of a leap to wholesale.”

Umbrella Companies

Pulling back to view the wider investor landscape, increasingly companies are organizing around a parent company which acquires multiple brands. It's been a winning move in many cases as the startup or independent brand has the customer savvy while the parent company has the operations knowledge that can help scale the business and provide access to technology, logistics, financial support. Just in the last five year s Michael Kors founded Capri, formerly Michael Kors holdings, and acquired Versace, while Coach changed the name of its parent company to Tapestry. Go Global Retail acquired Janie and Jack followed by Brums Milano, both in the childrenswear space, while in the healthcare field, Scrubs and Beyond acquired Life Uniform. American Eagle bought its second supply chain firm, Quiet Logistics, and Crocs scooped up fellow casual footwear brand Hey Dude. Global operators go where the customers are and a growth strategy is often to bring the competition into the fold. Thus the acquired brand can go from having a scattering of US stores to suddenly opening locations across Europe.

China hesitancy

“A topic of conversation among investors is the attempt to understand how much activity or focus to place on China for luxury retailers,” says Baird. “They’re tying it to the the political winds around the US's relationship with China after the experience of what has happened with Russia.”

While Russia certainly represented an opportunity especially for companies seeking the luxury consumer, it was not an outsized one. Pulling operations from China, on the other hand, would hit companies and investors hard. For companies already operating in China business will continue, but those that had placed China at the center of growth strategies are now reevaluating. “They might still source material in China but send it to Vietnam for cut and sew, for example,” says Baird. She also notes that many luxury retailers in Europe, and even in domestic shopping hubs like Las Vegas, are still reporting that they have not seen the Chinese tourist return post pandemic.