Shopping for Fashion

Decked out in khakis and blue button-downs, venture guys are not exactly on the cutting edge of fashion. But looks can be deceiving.

Venture capitalists are actually backing some of the most fashion-forward startups on the planet. In the process they’re reshaping the apparel industry for generations to come.

Over the past several years, many of the most prominent venture deals have been in the fashion space. Flash sale sites like Gilt Groupe, HauteLook, Vente-privee.com, Rue La La and others, which have raised several hundred million dollars combined, were at the forefront of the fashion investing trend. More recently, equally stylish companies, all with their own twist on ecommerce and fashion branding, have also raised big bucks.

Fashion wasn’t always en vogue with investors. Historically, VCs have steered clear of the fashion industry, in part because it’s hard to pick a winner.

“Combine that with the fact the most venture folks don’t come from a fashion or retail background, and that explains why there is a lack of investing in this arena,” says Scott Friend, a managing director at Bain Capital Ventures, which has backed Rent the Runway.

That also could explain why not many were interested in backing Rent the Runway when it first launched in 2009. The idea of renting luxury, high-end designs at a fraction of the retail price, and then returning the clothes after wearing them seemed sketchy to many investors. It was a concept that made more sense for movie videos not haute couture.

“Most VCs aren’t comfortable with the fashion world or the dress retail world, so it’s not surprising there wasn’t a feeding frenzy around the idea,” Friend says.

Even Friend wasn’t initially sure of the concept. But in doing due diligence, he spoke to senior executives at Bloomingdales and Bergdorf Goodman. He assumed they’d hate the concept. However, they revealed that 50% of their high-end dresses got bought on Friday and returned on Monday.

“So, in essence, customers were already renting their dresses. They were just doing it illegally,” Friend says.

His bet was that if a company like Rent the Runway could provide a low-cost way for users to “borrow” outfits legally and simply, women would jump at the opportunity. So far, that’s been the case. The company has grown to more than 3 million members who have access to a selection of 170 designer brands, 35,000 dresses and 7,000 accessories.

Danny Rimer, a partner at Index Ventures, is also interested in fashion startups, especially those that can’t be easily copied. His firm has invested in a number of online fashion companies, including Net-a-Porter, ASOS and most recently Nasty Gal.

Rimer, who believes apparel could account for one-third of all ecommerce transactions over time, is not interested in flash sales, daily deals, subscription services or celebrity endorsements. The most important thing he looks for in fashion startups is a unique brand identity that can’t be replicated by other startups or sold on other sites, likes Amazon.

That’s what he saw in Nasty Gal, an online fashion brand led by Sophia Amoruso, who started the company in 2006 selling personally selected vintage clothing on eBay. Using social platforms to promote the brand, Amoruso has since grown the company 500% annually.

“Fashion is a space the best ecommerce companies like Amazon might not find obvious to go after,” Rimer says. “Amazon might not be as good at describing fashion outfits in the same way they describe electronics and books”

Nasty Gal, which Rimers calls the first socially built brand online, is rooted in Amoruso’s personal taste and her ability to communicate with her customers over platforms like Facebook, Twitter and Instagram. He says there’s something about hands-on curation and personality—the heart of fashion—that doesn’t lend itself to algorithms and automatically generated recommendations that some websites provide.

“Fashion does not lend itself to that kind of automation,” he says.

Still, perhaps the biggest reason why venture capitalists are crazy about fashion is that technology is finally disrupting the industry, just like it has to dozens of other sectors before it. Witness the fact that Decoded Fashion held the first-ever fashion hackathon in New York earlier this year.

“Traditionally, fashion was a technology laggard,” says Karen Griffith-Gryga, who along with David Freschman, co-founded FashInvest, an investment platform and conference organizer designed to connect fashion startups with venture investors. “It was more about product and distribution, not technology.”

That has changed. Friend of Bain argues that game-changing startups like Gilt are not fashion companies. He thinks of them as technology and analytics companies first, and fashion companies second.

He offers up his investment in Rent the Runway by way of example. One of the startup’s first hires was not a fashion expert, but a data scientist.

“We are probably one of the only fashion companies in the world with a chief analytics officer,” he says.

That’s not the kind of hire you see at a traditional fashion company, but it is for today’s startups, which are collecting data on its members.

Another huge shift in the fashion world is the attitude of the luxury brands and prestigious designers, most of whom were loath to sell their premium apparel online for fear of tarnishing their haute couture image.

But live streaming of runway shows and have yanked open the industry, and fashion’s old guard are forced to enter the new world of social media, or fear getting left behind.

“It wasn’t until the advent of social media that you saw dramatic changes,” Griffith-Gryga says. “Before, fashion was purely a top-down industry. The distribution channels and premium retailers were locked tight”

“Now, people can sit anywhere in the country and be fashion-forward, not just in New York or LA,” says Freschman of FashInvest.

As a result, the premium brands are starting to flock to sites like Moda Operandi and Rent the Runway the way they once migrated to high-end department stores, like Neiman Marcus and Nordstrom.

Fashion is the fastest growing segment in ecommerce, and startup activity is just scratching the surface, says Pravin Vazirani, a managing director at Menlo Ventures.

Indeed, the market for clothing and accessories grew by 20% to $40.9 billion last year, up from $34.2 billion in 2011. That’s faster than categories like books and videos, which historically have been the strongest performers online.

“There’s lots of innovation left in the space in terms of how you make shopping more social and integrate elements of mobile,” Vazirani says.

His most recent investment, Poshmark, is a mobile app that allows anyone to display the contents of their closet online for other people to browse and buy. Vazirani says he was attracted to the company because it provides a hip, personalized way for buyers to find fashions they couldn’t get anywhere else.

“Poshmark is not just providing an outlet for that same designer sweater or that handbag at a cheaper price. It’s giving consumers access to that serendipitous discovery,” he says

Vazirani is continuing to look at new opportunities in the fashion space. Of particular interest are startups that cater to men, with venture-backed companies like Bonobos, Truck Club and Frank & Oak starting to make their presence felt in the fashion world.

Another interesting vertical gaining traction is tweens. FashionPlaytes—a site that lets pre-adolescent girls design and purchase their own outfits based on individual preferences and engage with each other on a number of fashion topics—recently raised a $5 million Series B round.

“The reason I went after FashionPlaytes is because there was a gap for tweens. Nobody was really serving them,” says Rudina Seseri of Fairhaven Capital Partners.

Now VCs just have to hope that their fashion investments make them look better than those khakis and blue button-downs do.

Tom Stein is a Palo Alto, Calif.-based contributor. He can be reached at tom.stein@yahoo.com.