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In the post-direct-to-consumer (DTC) era, fashion founders are trading VC dollars and bloated valuations for organic growth. Instead of beginning with revenue targets and exit plans, many are finding less austere approaches to brand-building such as posting to social media but running fewer ads, selling in established retailers and collaborating with other brands. They’re not in a rush to grow as quickly as those before them — nor is making an exit front of mind.
“The DTC boom was built on a belief that brands would see huge relative benefits from owning a direct relationship with the consumer and achieve vastly higher margins from cutting out third-party retailers,” says Tom March, founder and managing partner of VC and private equity company Redrice. “Given the rising costs of digital marketing and lack of brand differentiation, the benefits of DTC-only models have been reduced.”
Now, brands are more hesitant to raise funds — especially in the early days — because of the strings and pressures attached. Instead, they’re focused on slower, more manageable growth.
“While funding can certainly be a valuable asset as the company expands, my focus is on taking a cautious approach and making careful decisions,” says Taehee Park, founder of fashion brand Tae Park. “I prioritise the growth of Tae Park as a lifestyle brand that inspires and resonates with people, rather than merely focusing on next quarter’s or even year’s targets.” LA-based label Aya Muse founder Tina Rodiou echoes this sentiment, saying she wanted to grow the brand at a slower pace to build a stronger foundation. Founders of jewellery brand Éliou, Duda Teixeira and Cristina Mantilla, are expanding product categories only when it feels “right” — and they feel equipped — to do so. “We’re risk-takers, but we assess the risks that we take before we do so,” Mantilla says.
It’s a necessary step. The market is more crowded than ever, says Polly Wong, president of DTC marketing agency Belardi Wong. “There are 100 times the amount of brands on Shopify than there were in 2010.” Brands need to find alternative routes, be it wholesale or collaborations. Less pressure tied to funding inevitably means less dollars in the bank to fund both advertising and production, adds Redrice’s March. Founders need to get creative — and be patient.
Dollars are down
VCs aren’t funding traditional apparel like they used to. There’s been a normalisation in the last few years following a period of sharp investment growth in the 2010s, March says. And now, it’s the more niche subsets that are drawing the remaining funding dollars, such as resale and fashion-tech. Given fashion’s adherence to fluctuating trends, it’s not a surefire bet for investors. For brands, growth isn’t necessarily linear. So when valuations are too high — as many during the VC funding boom in DTC were, says March — unprofitable brands are left to raise too frequently in attempt to “grow into” their valuations. This ‘growth at all costs’ mindset is unsustainable, he adds.
“These days, founders of emerging DTC brands are different by necessity,” Wong says. “The reality is they have to be scrappy, lean and be focused on their P&L [profit and loss] so that they don’t run out of money. Because there isn’t the kind of funding that there used to be.” This, in turn, supports the nudge for founders to get their products in front of consumers in other ways, like wholesale.
Staggering customer acquisition spend
When it comes to marketing, spend is high. Though Meta ad prices dropped 17 per cent in the first quarter of 2023, the company reported during its Q1 earnings, on the whole, CPM (the cost an advertiser pays for one thousand views or impressions of an ad) has surged (in 2022, Insider reported that Meta’s CPM was up 61 per cent year-on-year). So, to start out, founders typically take to Instagram (posts, not ads) to start building brand awareness organically, and mix up their presence across platforms like TikTok to diversify social strategies, so as to avoid reliance on any one outlet.
“I started the brand on Instagram because I knew that it was a platform that allowed for a larger audience to see the pieces that I was producing,” Aya Muse’s Rodiou says. Éliou’s Teixeira and Mantilla didn’t set out with a concrete plan when they launched the brand in 2018. “It was always more of a gut feeling,” Teixeria says. The brand now has a small team (and no outside investors). “It really picked up speed,” Mantilla says.
Emily Oberg, founder of Sporty Rich, launched the brand’s Instagram account three years before releasing any products. After building a loyal following with her moodboard-like aesthetic offering, she began with a pre-order model, before swapping to prior production runs about one month later. EB Denim founder Elena Bonvicini, meanwhile, initially sold her jeans to classmates and sorority sisters, then shifted to influencer gifting in 2019. Cue creators Chiara Ferragni and Danielle Bernstein tagging the jeans, and soon, models Kylie Jenner and Hailey Bieber were spotted sporting the brand (then came Selfridges and Revolve).
Like their DTC predecessors, today’s brands are managing to cultivate large social followings. But customer acquisition via Instagram alone is a slow burn and standing out remains a challenge. Without external funding for ad dollars, brands are looking to other strategies — such as tapping other, established companies, be it a retailer or another brand — to gain visibility and credibility among shoppers.
Once they’ve done so, there’s a renewed emphasis on keeping consumers around, Wong of Belardi Wong says. “[Brands] are quickly learning that the greatest path to profitability is focusing on consumer retention and lifetime value. Even as brands are still marketing for new consumers, we’re seeing a renewed emphasis on principles around customer relationship management and lifetime value.”
Storytelling is more important than many on the finance side recognise, Redrice’s March says. “Scaling a start-up is about the physics and the chemistry,” the investor explains. The former, understood by investors, is about getting the infrastructure and economics right. The latter, typically overlooked by founders and investors, he contends, is about building an emotional connection with the consumer. “The strength of a brand is not in its logo or how much people remember it, it lies in the emotions it is able to conjure,” March says.
To this end, brands are building narratives around their offerings. Park of Tae Park says: “We continue to leverage Instagram today as our storytelling or blogging platform. It allows us to build genuine connections with our customers and community.” Lana Johnson, founder of Brooklyn-based label Orseund Iris, recently hired an operations director and an assistant manager to run the brand’s day-to-day operations, so that she can focus on design and storytelling, she says. It’s also why brands including Éliou, Sporty Rich and Tae Park are turning to physical spaces to make their narratives more tangible. Wholesalers recognise the importance of this — both Ssense and Moda Operandi highlight “strong storytelling” as a key quality they look for in brands they’re considering bringing on board.
The return to wholesale
With less paid advertising to drive customers to brand sites, founders are turning back to tried and true wholesale channels to get exposure and sales. Éliou sells through retailers including Net-a-Porter (where it began with a two season exclusive), Harvey Nichols, Simoett and Matchesfashion, while Aya Muse sells through Luisaviaroma, Selfridges, Mytheresa and Revolve.
“Your number one greatest source of brand awareness, brand exposure and new customer acquisition is wholesale,” Wong, of Belardi Wong, says. Being seen on retailer sites like Net-a-Porter, Moda Operandi and Ssense is a major push, founders say. “The hardest thing about starting a company or brand is getting that consumer awareness and trust,” Éliou’s Mantilla says. By partnering with a respected retailer, brands attain a “stamp of approval”, Teixeira adds. Lili Chemla, founder of LA label Leset, who also launched with Net-a-Porter, uses the same verbiage. “Having that stamp of approval and brand visibility from these big retailers is so important,” she says, as this would otherwise take more time and investment to build.
However, new wholesale-brand relationships look different today, and brands can be more selective when it comes to choosing the right partner than they used to be. “We were approached by a lot of wholesalers,” Oberg says. She wants Sporty Rich to be stocked at the best in class stores (she offers its stockist Selfridges as an example), alongside luxury labels. It’s currently also stocked at wholesalers including Net-a-Porter, Naked Copenhagen, Australia-based Incu and Farfetch.
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One consideration for founders is how much data a retail partner can offer. Moda shows brands views per item, the number of add to carts, what items were added to customer wish lists with the “save for later” function and converted transactions. The retailer also shares some “high-level consumer analytics and topline data” including returning versus new clients shopping, top “cross-shopped” brands, along with collection specific data such as average unit retail of total items sold and classification performance.
EB Denim’s Bonvicini receives weekly sales report spreadsheets that detail sell-through for each product from various wholesalers. “These reports allow myself and my team to get a quick read on what product is performing well and how each style is being received.”
Wholesale retail still comes with sacrifices, and not all are on board. Orseund Iris, which worked with Net-a-Porter pre-pandemic and briefly with Moda Operandi in 2018 for one of the retailer’s online trunk shows, is back to purely DTC. “Selling directly to our customers helps with operational efficiency, environmental sustainability as well as profitability and branding [control],” Johnson says. It also affords more consumer insights (a notorious limitation of wholesale selling, because the wholesaler has ownership of the customer database). “Selling DTC helps us control our inventory, review sales data for more accurate reorders and enable us to have conversations with customers,” Johnson says, noting that the brand is also able to retain more control over pricing and promotions with this format.
Collabs are key
Some founders are partnering with each other to improve their reach and exposure. This is savvy, Wong says: “There’s not going to be any easy money out there anymore.” But she adds that it will only work if there’s a genuine affinity between the brands. Johnson is keen to explore collaborations for Orseund Iris — both in its core category of womenswear, but also in areas like home decor and menswear. “This will attract new customers and strengthen our brand loyalty,” she says.
For summer 2023, Éliou released a collab with Paris-based Maje. It ticked all the boxes: the pieces could be handmade, and the brand stories aligned. The collection is stocked on Maje’s website and in stores, broadening Éliou’s reach.
Sporty Rich’s Oberg says she collaborates with brands she already uses and buys — past collabs include Lacoste and Sunset Tower Hotel. The brand’s second Adidas collaboration dropped yesterday. “We always want to do something that makes sense for both audiences,” the designer says. “It’s a way for brands to get new eyeballs — and it gives our existing community something more exciting.” It’s another strategy to keep customers coming back.
At the end of the day, founders need to be agile. “Consumer brands rarely grow in a straight line,” Redrice’s March says. “Founders and investors need to achieve the right balance between ambition and pragmatism, knowing when to consolidate and when to ride the wave and accelerate growth.”
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