Fashion is one of the fastest growing sectors in India and it is no surprise then, that this space has been generating a lot of investor interest over the last few years. 2015 in particular was a great year for Indian fashion businesses as it saw a lot of investment actively on angel, venture capital (VC) and private equity (PE) fronts. Even IPOs seemed to be back in fashion.
Fashion: India’s Sunrise Sector
Fashion is the sunrise sector in India. It presents enormous business opportunities for manufacturers as well as marketers (wholesalers, distributors and retailers). More often than not, business, whether new or established, need to access external capital. When bootstrapping a new venture is not possible or internal accruals are not enough to fund expansion; businesses can tap funds externally.
Debt and equity are two major sources of external financing. In recent times, VC and PE have emerged as preferred funding options for early-stage ventures and relatively mature companies respectively; whilst angels and seed funds have come to the rescue of new businesses and startups.
Mature companies may also raise capital from primary markets via IPO route. Strategic investment is yet another type of equity investment wherein a larger company or HNI investor picks up stake in business which they reckon an adjacent or related opportunity.
Fashion: An Emerging Investment Hotspot
Global fashion brands (apparel and accessories, and footwear in particular) see India as a potential sourcing hub. This provides ample growth opportunity to domestic manufacturing brands and contract manufacturers.
On the export front, homegrown companies in textiles and apparels, footwear and jewellery seem to be doing well. Retailers, Indian as well as global, are gung ho about the country’s thriving market. With growth of branded fashion, entry of foreign brands and development of modern retail in India, the fashion companies across the value chain are fast becoming investment hotspots for investors.
A significant portion of FDI in India comes through PE route and several fashion companies have benefitted from this. Majority of fashion e-tailers have been funded by global PE firms.
According to MD (Private Equity), Everstone Capital Advisors, Deep Mishra, “The Indian fashion sector has seen several developments in the past few months. There have been PE deals in Fab India, Ritu Kumar, Anita Dongre and Biba. Many other domestic apparel companies are in the market looking for investors to back them with growth capital. Online fashion retailers, marketplaces and online only brands have also been actively raising money from tech investors. Marquee global brands such as GAP and H&M have entered India.”
Partner & Leader (Private Equity & Transaction Services), PwC India, Sanjeev Krishan, states, “Fashion space is part of the wider consumer theme and has attracted fair amount of interest from PE/ VC funds. As investors stay away from any sector which is severely regulated, consumer and consumer derivatives are big investment themes for them. Owing to growing urbanization in India, and enhancement in consumer spending, fashion segment has grown and this found notice with the PE/VC funds too.”
Co-Founder at Applyifi and Founder at The Hub for Startups, Prajakt Raut, affirms, “Investors look at investing in sectors that have a large market size, and within that, they invest in companies that have a reasonable chance of being a dominant player. Fashion industry has headroom for significant growth, and one in which there will be opportunities across different socio-economic strata, as well as at different price-points. Apart from fashion brands, support sectors in the fashion and apparel sector like logistics, automation robotics in warehousing and production, etc. will be sectors that investors will be bullish.”
Besides, he feels that it is usually difficult for investors to take bets on very early-stage companies in sectors like apparel where the scalability of the company will depend largely on good quality execution. Hence, for categories like apparel, there would be growth-capital available, but capital for proving the concept or for finding product market- fit will be difficult to get.
Buoyed by the e-commerce and m-commerce wave, a slew of fashion startups have come up over the last five years or so.
Co-Founder & Principal, IvyCap Ventures, Norbert Fernandes, observes, “A number of trends have converged that have made possible disruptive structural changes in the seemingly traditional fashion/ apparel business. The most important themes we are seeing is that of a complete shortening of the design-to-sale cycle, and personalization using technology at scale. Within that, lie several opportunities for startups and, by extension, PE/VC investors. Using data intelligently to predict fashion trends is one.”
Earlier, fashion houses would dictate trends with their collections, now the tables have turned and trends are created almost instantaneously. There is opportunity in creating a production cycle catering to several shorter trends created organically in a year which means reliance on data analytics, shorter production techniques, leaner working capital frameworks. All of these represent attractive investment opportunities in my view.
High Investor Sentiment
Investments go where the potential is and fashion clearly is among the most promising sectors. A number of successful exits have also motivated other investors to park their funds in this space. Apart from this, there are various other factors fueling funding in fashion.
Reiterating that PE/VC funds view fashion as part of the larger consumer derivatives theme, Krishan of PwC avers, “There has been a whole focus on making ‘fashion’ more affordable so it achieves a wider base of customers. As a result, certain segmentation has emerged within the sector, and this led to further growth in the sector. Now the focus is on newer delivery models.”
He also shares an estimate of funds committed through angel and VC/PEs in fashion segment in recent times: US$ 0.5 billion across 32 deals and US$ 0.34 billion across 28 deals in 2015.
Strong operating performance by a few PE-backed fashion companies like AND Designs (now re-named as House of Anita Dogre Ltd.) and Biba have led to very profitable exits leading to more interest in the sector by other PE funds, says Mishra at Everstone, adding that same store performance for many fashion brands continues to be positive and listed apparel companies have outperformed the overall indices backed by continued growth. Overall industry remains very under penetrated with extremely strong macro performance expected over the next decade with growing urbanization, premiumization and customer segmentation.
Fernandes from IvyCap notes, “We are definitely seeing a cooling off of valuations from what we were getting accustomed to seeing in the last 12-18 months. But I would emphasize that that is not the same as cooling off of investor interest. India still remains a very sought after destination for long term capital and large PE/VC investors continue to actively evaluate Indian investment opportunities.”
He further says that the exit situation has improved by leaps and bounds in the last two years, with several large and many small-medium strategic buy-outs. More acquisitions are expected in the next 12-18 months, as capital gets concentrated in the top two-three players in each segment, and inorganic growth increasingly becomes a strong driver for future growth.
Investor Expectations
Angels are individuals or group of individuals. VC and PE investors can be individuals as well as institutional. But they all take into consideration various qualitative and quantitative metrics to arrive at their investment decisions. Though it is difficult to evaluate early stage investee, angels do consider keys like customer adoption and retention, market size and early penetration, feedback from early adopters etc. VCs look at three key areas when evaluating a prospecting investee: market, product differentiation and the team.
They buy shares of the early stage company at a fixed price with expectation to have substantial return on the investment (RoI) at the time of exit. PE investors invest in late stage company with investment expected to return ~2-4x at the time of exit. Furthermore, online and offline business have their own intricacies to be adjudged from investment point of view.
Co-Founder at Seedfund and Founder at Pinstorm, Mahesh Murthy, underlines key metrics for investing in an online venture, “As far as I am concerned, the key metrics to look at are leadership in segment, unit-level profitability, and a significant moat that competition will find difficult to cross.”
Everstone’s Mishra explains that for a PE investor, valuations are typically based on P/E (price-earnings ratio) and/or EBIDTA multiples. Apropos key metrics, he says, “We would look at five factors: Differentiation and a clear positioning which can be maintained over a period of time in the face of rising competition; a sound management team with proper systems and processes; reasonable valuations; clearly identified vectors of growth and a track record of execution; and an agreed exit time frame and exit thesis.
Big Names in the Game
The prospects in fashion and especially fashion e-commerce, has caught the attention of most recognized and respected names in Indian business fraternity. Chairman Emeritus of Tata Sons, Ratan Tata, has been angel investor to several online startups in fashion and specialty retail: Firstcry (kids-focused e-tailer); Bluestone (online jewellery retailer); Zivame (online lingerie retailer); and Kaaryah (online women’s formal wear brand).
IT czars Azim Premji and Narayana Murthy have made strategic investments in fashion businesses. Premji, through his personal investment, ‘Premji Invest’, invested in fashion e-tailer Myntra. Murthy’s Catamaran Ventures picked up strategic stake in Yebhi.com.
Founder and CEO of People Group (which owns businesses like online matrimonial service Shaadi.com, real-estate portal Makaan.com, mobile content and applications company Mauj Mobile and People Pictures), Anupam Mittal, is angel to Pretty Secrets.
Ravi Gururaj, a member of the NASSCOM executive council, also invested in Pretty Secrets. Sanjay Mehta, Co-Founder and CEO, MAIA, a business intelligence firm, invested in Fabally. M-commerce too has begun to find place in HNIs’ investment portfolio. Sachin Bansal of Flipkart is angel to fashion discovery app Roposo.
Raut at Applyifi notes, “The words, entrepreneurship and startups became quite popular in India in 2015. A large number of good concepts and startups got benefited from the increase in the number of angel investors in the country. I believe that trend will continue. As the overall ecosystem for entrepreneurship strengthens, and as we see a number of enablers (e.g., accelerators, incubators, mentors, etc.) helping teams with commitment and passion to build strong businesses around their ideas. Investing in startups will become an asset class that many HNIs as well as senior professionals will look at seriously.”
Utilization of Funds
Angels generally are a one time investor in a venture. There could be several rounds of funding during early growth stage by VC and in late growth stage by PE investors. Myntra had nine rounds of funding before acquisition by Flipkart. Also, there can be multiple investors in a single investee company.
SSIPL is backed by Oman India Joint Investment Fund (OIJIF), a private equity fund sponsored by Oman’s sovereign wealth fund State General Reserve Fund and India’s largest lender State Bank of India, and Tano Capital as investors.
Startup capital or seed money can be used for office space, permits, licenses, inventory, product development and manufacturing, marketing or any other expense.
VC and PE funds are mainly used for business expansion and growth. These can be used to expand manufacturing capabilities or retail footprint, fund new technologies, online operations, debt repayment, brand building, marketing and promotions etc. Besides providing exit to PE investor, the company can use surplus funds raised via IPO to grow its business.
Luxury Upping the Ante
Luxury consumption is yet to take off in India and is still a niche market. Obviously, investor interest in this segment has been not as much of as compared to other segments. Nonetheless, a few fashion firms in this space have obtained PE funding.
In 2011, Moet Hennessy Louis Vuitton’s PE arm L Capital invested in Genesis Luxury, which sells labels like Canali and Jimmy Choo. Earlier in 2009, UK Private Equity Henderson invested US$ 17 million in Genesis and a year before that Sequoia Capital, Mayfield fund and Silicon Valley Bank provided private equity of Rs 110 crore. In fact, Genesis was the first player in fashion segment to get private equity.
Another company to obtain PE funding in this space is Ethos, a luxury watches retail chain. Sixth Sense Ventures invested in Ethos in 2014.
Notably, French private equity firm IndEU Capital is said to be raising a fund targeting the Indian lifestyle to luxury companies that target the mid-to-luxury segment.
It is looking to invest in both B2B and B2C firms with focus on segments such as cosmetics, ready-to-wear, couture, interior decoration, e-commerce, spas, jewellery and accessories.
Impact of Digital Disruption
The digital fashion space has been seeing a lot of investor interest; apparel and jewellery being the biggest gainers. Starting with e-commerce websites and stores, it has further evolved with emergence of m-commerce.
Fashion startups come in different genres. Likes of Myntra, Jabong, Yepme, Indianroots, Clovia, Zivame, Zovi, Bluestone and Caratlane are e-tailers and Yebhi, Voonik and Bestylish are online fashion aggregators. On the contrary, Woopler, Roposo, Hey Leela are fashion discovery apps.
Murthy of Seedfund expounds, “What was interesting to us in Voonik was the clear focus on being a data-driven marketer of fashion and differentiating from others by letting other companies take care of inventory, back-end, infrastructure and such while focusing only on the most profi able part of the chain—the one closest to the customers.
Digital disruption has forced offline retailers to rethink and also include digital channel(s) to their retail strategy.
Murthy says, “Fashion is fashion, regardless of whether you look at it digitally or in the retail world. For consumers, it doesn’t make much of a difference. The challenge is to build a premium fashion brand in India, either at the apparel level or at e-tailer level and most businesses have failed at this task. This is due to rampant discounting for short-term market share as opposed to any long-term, well-planned effort to build brand preference. Our online fashion businesses will continue to do badly unless there is a clear effort to differentiate on a plank other than lower price.”
Significantly, global PE investors have led the way in backing online fashion firms. Most of the domestic investment firms have kept their hands off the online businesses for reasons such as unproven models, high risk involved, capital protection, etc.
Offline-Online Wars; Rise of Omni-Channel
Whilst brick-and-mortar retailers and online sellers are battling it out, manufacturers are benefitting from both. From investment perspective, online fashion businesses are finding huge favour lately. Howbeit, increasing number of retailers is shifting to Omnichannel retail model. As such, offline retailers are also building online presence and vice versa. Fashion e-tailers Yepme, Caratelane have already gone offline.
Krishan at PwC apprises, “15 of the fashion deals were in the offline space in the year 2014 and they accounted for USD 0.4 billion of investments; in 2015 however, online fashion deals were almost 85 percent of the deal value in the fashion segment. This indicates that online delivery models have found fancy with the VC investors; however the whole sector is in a very early stage and I believe there is space for both offline and online segments. Offline has its space as newer products/brands come in.”
Importantly, high valuations remain a prime concern for investment in online fashion companies.
“It is commonly believed that an entrepreneur is judged by their valuation. This is not true. An entrepreneur is judged by value created – which often has nothing to do with valuation. The media hype around ‘unicorns’ – startups with valuations in excess of US$ 1 billion has created expectations that they can never live up to – and indeed, many of them have already been devalued significantly since their ascending to that status,” Murthy at Seedfund clarifies.
“Like any disruptive trend, e/m-commerce has gone through a phase where valuations have factored in a lot of future growth and excitement, and I believe that phase is running out its course now, which bodes well for everyone in the ecosystem,” says Fernandes (IvyCap), while maintaining, “At least internally, we like companies that are creating brands. If you view it from that point of view – the channel of sale is irrelevant. Indeed several of our investee companies sell primarily online, but there is nothing to stop them from selling offline tomorrow. I don’t look at these two very differently.”
“As the market matures and a much larger of good companies are available for investors to deploy capital in, valuations will become practical. Offline businesses are unlikely to get early-stage capital because of a few reasons: angel investors and VCs do not deploy capital for infrastructure building. And offline businesses do not scale up as rapidly as online businesses can. However, offline businesses that demonstrate evidence of ability to scale will find growth-capital,” says Raut (Applyifi ).
Mishra at Everstone indicates that there is now a serious consolidation and correction expected there, driven by capital becoming scarce. It is yet to be seen how online volumes will hold up once the discounts and free reverse logistics reduce due to the inevitable correction. If history is a guide, there will be a few survivors who will be very valuable but the landscape will be littered with failed startups once the tide of capital recedes. He foresees opportunities arising offline fashion sector also. Investors will prefer brands/managements who have omni-channel offering. A well crafted brand with a clear differentiation and sharp positioning will find takers, whether financial or strategic.
The Challenge of Successful Exit
Aside success stories, there are also many investors in fashion businesses who have struggled to get expected returns. Successful exits still are a challenge?
Mishra of Everstone Capital asserts that well run fashion businesses should not face a challenge in exits. But fast fashion cycles leading to inventory pileups, expansion into marginal locations and commoditization can create a business issue, which will hamper value creation and consequently exit.
According to Krishan at PwC, the growth in some of the fashion segments has been very high – at the same time, some of the sectors also have a significant cash component. While it is easier for PE investors to fund some of these businesses when they are starting up, or when they are smaller. It could be hard for them to provide higher anticipated valuations for more mature businesses until the business has built in controls/procedures which enable it to mitigate some of the risks arising of their own growth – many a times, Managements are tardy in getting these controls/processes in place, which is a cause of worry for PE investors.
Applyifi’s Raut deems that successful exits are a challenge across categories. In fashion and apparel industry, there are a number of brands already existing; value creation for investors will happen only if they are able to scale significantly.
IPO as Exit Strategy
Nowadays, initial public offering or IPO is gaining a greater acceptance as preferred exit route for PE firms than other cashing out options such as secondary buyouts and trade sales. IPO is regarded as the best exit strategy for PE investors in sluggish economic scenario. Moreover, it can be an excellent measure to understand the actual valuation of the firm. Howbeit, IPO makes sense for profitable companies that have a market value exceeding 100 crore. Of late, the IPO market is seeing a flurry of activity from PE-backed fashion companies.
In 2015, Samara Capitalbacked clothing retailer Monte Carlo got listed. Coimbatore-based SP Apparels and Numero Uno, a denim wear brand filed IPO papers with SEBI. Footwear retailer SSIPL had refilled IPO. SAIF Partners-backed jewellery retailer Senco Gold is eying IPO by 2017-18.
All the above mentioned firms are backed by PE players. There are several fashion brands and companies in India that have the scale and growth required for public offering. It only remains to be seen how many more fashion firms decide going public or getting listed at stock exchange!
Future Outlook
With new FDI policy (apropos single brand retail) in place, overall retail sector in India including fashion segment is expected to get a major fillip, giving a big boost to investor sentiment. If FDI in multi-brand retail is allowed, it will give further impetus to the sector as well as investor interest.
Government initiatives like Make in India and Start Up India are expected to boost manufacturing and startup ecosystem in that order. Potential fashion businesses backed by these campaigns will present considerable investment opportunity.
Overall, sustained momentum expected across angel and VC/PE funding. Some PE-backed fashion firms are soon expected to get SEBI’s nod for IPO. On the regulatory front though, investor community is looking at more favourable announcements in terms of regulations and tax impact.
