For the past decade, fashion startups with disruptive business models—from direct-to-consumer brands to clothing-rental platforms—have taken the industry by storm. Now, many of these once-scrappy startups are going public.
This year alone, ThredUp, Poshmark, and Warby Parker have gone public; Rent the Runway and Allbirds have filed for IPOs and are expected to go public soon. A look at these companies’ financials reveals that none of them managed to create a profitable business while also scaling fast enough to meet investors’ expectations. And some of these companies’s stock—including ThredUp and Poshmark—have stayed flat or tanked since their IPO. All of this prompts the question of whether the age of the fast-growing, VC-funded fashion startup might be coming to an end.
While it might seem surprising that all of these companies are going public so close to one another, there are some bigger trends that help explain it. For starters, many of them launched around the same time, roughly 10 years ago, says Dan Frommer, a veteran tech journalist and editor-in-chief of The New Consumer. They also received large amounts of capital from investors who treated them as if they were tech companies with the potential to scale quickly. (Rent the Runway, the oldest of the bunch, launched in 2009 and has received $500 million in funding; Allbirds, the newest, which launched in 2015, has received $200 million.) But those investors are looking for a return on their capital—which means going public or getting acquired. “In the venture capital business model, companies are expected to show returns on these funds somewhere between 5 [and] 15 years,” Frommer says. “So the minute a company takes venture funding, they’re on a ticking timer.”
And 2021 happened to be a particularly good year to go public, according to Sucharita Kodali, a principal analyst at Forrester Research, who specializes in e-commerce and retail. There have been a record number of IPOs this year, partly because companies put them off last year when the pandemic caused so much instability in the market. Now, investors are looking for places to put their money. “Among the wealthiest people, there is a ton of cash floating around,” she says. “Last year, people couldn’t travel, buy cars, or eat at restaurants. So if your net worth went up and you don’t have much to spend your money on, you might invest in an IPO.”
Many of the brands going public now actually bucked the broader retail downturn and thrived during the pandemic, so it makes sense that they want to capitalize on this success. In the case of ThredUp and Poshmark, there was already a growing demand for secondhand goods; during the lockdowns, consumers turned to these platforms to buy these goods online. Warby Parker quickly pivoted from its retail stores to its existing e-commerce business, while Allbirds offerings of athleisure clothes and shoes were items people wanted in the pandemic.
Rent the Runway stands apart in this regard, because it didn’t have a particularly strong year. The company built its business on renting clothes for fancy events and the office, but consumers didn’t need formalwear for much of 2020 and weren’t dressing for work. While the company says business is beginning to return, the delta variant postponed many events and delayed the return to work. “I’m scratching my head at their decision to IPO,” Kodali says. “Their numbers are down, and there is nothing particularly compelling about their business right now.” According to the company’s S-1, its active subscribers dropped from 133,572 in 2019 to 54,747 in 2020. This year, subscribers seem to be coming back, but they’re nowhere near pre-pandemic levels. Frommer suggests the reason for the IPO’s timing might be that company needs to raise capital in order to keep the business going.
The future of fashion
The process of going public reveal exactly how hard it is to both turn a profit and grow quickly as a fashion startup. Frommer says many of these companies were much more tech-forward than their predecessors, so investors treated them like tech companies. Warby Parker and Allbirds, for instance, built digitally native brands that took advantage of everything the internet had to offer, from social media to immersive websites. Some investors hoped that successful e-commerce brands like these could eventually take over the market. But it turned out that there were limits to their growth. Unlike software companies, these brands had to develop products, build supply chains, and eventually build retail stores, all of which are capital intensive. A decade later, Warby Parker has only 1% market share by revenue, according to its SEC filing in August. For comparison, Lenscrafter’s parent company, EssilorLuxottica, founded in 1961, dominates with 20% of the market.
For Rent the Runway and ThredUp, the challenges were even more complex. Both companies collected vast quantities of data about their consumers and created systems to digitally tag clothing. They also had robust online sites where customers could filter through clothes to rent and buy. But to make all of this work, they had to create the physical infrastructure to process the garments. Rent the Runway famously built the largest dry-cleaning facility in the world, and ThredUp has built enormous warehouses to collect, photograph, and ship secondhand garments. Again, all of this requires a lot of capital.
Warby Parker had a successful direct listing last week, hitting a $6 billion market cap on its first day of trading. It’s too early to say how the company will do on the public market long term: Some analysts said the company was overvalued; others believed it was merited because the company has good margins, an engaging brand story, and is likely to keep growing. Poshmark’s stock, on the other hand, has declined steadily since it went public in January. Its third quarter revenues were below estimates, which it partly attributed to Apple’s new privacy policies that make it harder to track users and effectively market to them. ThredUp’s stock price, meanwhile, is near to its public debut in March. While analysts believe the company has room to grow as the resale market picks up, its net losses grow every year as it keeps building out new warehouses to process clothes. These losses are typical for a company in growth mode, but are something investors are watching closely.
The performance of these companies shows how hard it is to build a profitable, high-growth fashion business. Venture capitalists have pumped hundreds of millions of dollars to help these companies scale, but much of this capital has gone toward expensive infrastructure, from warehouses to retail stores. And over the past decade, the market has been crowded with other fashion startups, which has meant steeper competition for a fixed number of consumers. It’s also increasingly expensive to acquire new customers on social media, cutting into their margins. “None of these businesses seem like it’s going to be the next Amazon,” Kodali says.
As publicly traded companies, they will no longer feel the pressure of venture capitalists, but there will be new concerns: They’re now beholden to shareholders with their own expectations when it comes to growth and profitability. And if they don’t perform, founders risk being removed from their leadership positions by the board of directors. In many ways, it’s out of the frying pan and into the fire.
So what next?
There are other brands from this cohort of startups that might decide to jump on the IPO bandwagon, including Everlane, Away, and Glossier. These brands have collectively raised upward of half a billion dollars in venture funding, so their investors may be looking for a payday soon. But as a new generation of entrepreneurs begins to build fashion businesses, they may not be looking to publicly traded companies as inspiration. Kodali says that rather than going out to raise vast sums of VC funding and growing exponentially, today’s startups might be keener to grow slower, but work toward profitability. They might take a page from companies like menswear brand Buck Mason, fine jewelry brand Aurate, or womenswear brand Cuyana, which have taken much smaller funding rounds and have been more focused on building sustainable businesses.
Kodali points out that with the startups founded a decade ago, entrepreneurs were aiming to own a small stake in a billion-dollar business. But today’s entrepreneurs might be more keen to own a larger stake in a hundred-million dollar business. “You have to work a lot less hard to be a hundred-million dollar business,” she says. “There are fewer barriers to entry, you’re under the radar, and you don’t have a target on your back when you’re smaller. And at the end of the day, you make just as much money.”