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Funding and investments in Indian fashion

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The fashion and lifestyle sector in India has shaped up rather well since the turn of the new millennium. People today are as fashion-conscious as any celeb or a socialite, and this has resulted in increased fashion spending across the consumer segments. Fashion covers a whole range of product segments, viz. textiles, apparel, footwear, jewellery, along with other wearable and carry-on fashion accessories such as timepieces, eyewear, bags and wallets, etc. Since people will continue to consume fashion in some form or the other, there lies a massive, long-tailed opportunity for all kinds of fashion businesses, whether manufacturing, distribution, retail and other fashion-focused companies also. The sector’s massive potential has not gone unnoticed in the investors either. The last few years have seen an increased confidence in the Indian fashion sector, and consequently, funding and investments are also rising across the spectrum: Seed and Angel funding, Venture Capital (VC), Private Equity (PE) and even Strategic, or HNI investments.
Fashion: A Promising Investment Avenue
Talking about the evolution of the Indian fashion market, Partner, Grant Thornton India, Prashant Mehra states, “The sector has evolved manifold, traversing the un-fragmented ‘mom-and-pop’ store era to reach today’s sophisticated large domestic and international brand dominated scenario. The primary driver behind the growth has been the expanding retail footprint of the brands. The entry of fashion brands has ramped up competition in the space. Apart from the increasing competition, a key driver has also been the rise in disposable income of the rapidly growing Indian urban population that is aware, educated and brand-conscious. Basis recent statistics, the Indian urban buyers are shopping for apparel at least 10-12 times in a year, which is much more from what they did 5 years back. India presents a great opportunity for the fashion brands to grow and most fashion companies are looking for ways to enter this high potential market.”
Regarding the investment scenario, he apprises, “The Indian fashion retail industry has been at the helm of India’s growth story with over 500 transactions in the last decade valued at around US $13 billion. Of this, US $1.3 billion has been transacted through Domestic M&A, US $10 billion through PE/VC monies and the balance through inbound investments. These investments are a testament to both the interest and potential in the sector.”
“Domestic consumption is a key investment theme for most PE/VC investors operating in India and the fashion sector (broadly defined) fits very well into this. In addition to the sector agnostic funds, there are also specialist funds like L Capital Asia – sponsored by international luxury firm LVMH – that focus specifically in this space,” states Founder of Venture Intelligence, Arun Natarajan.
Sharing his overview of the PE/ VC landscape in Indian Fashion, Co-Founder & Director, IndigoEdge, Shivakumar R states, “India is a nascent market when it comes to brands. Apparel is one segment where we have seen brands such as Biba, Anita Dongre (AND) and W break out in the women’s ethnic wear segment. We are also seeing the emergence of some interesting brands in western wear (online and offline – Zink London, Stock Buy Love, Faballey, Kaaryah, etc), online jewellery brands (Bluestone, Caratlane). Given that Myntra, Voonik, Limeroad, etc are well-funded, we see more investments into brands over the next few quarters. The next wave of investments will be in brands that can reduce the working capital requirements and yet scale fast.”
Noticeably, the fashion-focused startups and entrepreneurs have also been drawing a great deal of interest from Angel/Seed investors. Says Co-Founder at Applyifi and Founder at The Hub for Startups, Prajakt Raut, “As more and more people come into the middle-class segment that has money for discretionary spends, some of that spending will go into the fashion and lifestyle segment. Therefore, the sector represents a large market opportunity, and it represents an opportunity for entrepreneurs to create businesses. However, the sector is fragmented across different price points and value propositions and building a brand in an already cluttered marketplace is hard.”
A Glance At The Year Gone By
2016 was marked by a decline in overall funding and investments in India, compared to 2015, which was particularly a good year. The fashion sector was no exception. However, long-run prospects for fashion remain bright!
According to Venture Intelligence’s Natarajan, “Investments in the sector tend to follow the trend in overall PE/VC investments – for instance, on the back of lower investments in e-commerce, overall PE investments in India cooled off by 12 per cent in 2016. The investments in the fashion sector also fell correspondingly.”
VC and PE investment appetite has been different, underlines Director, Motilal Oswal Private Equity (MOPE), Amit Choudhary. He further says, “With many young startups coming up with a variety of ideas in the broader fashion business, there has been a lot VC activity. Fashion e-commerce startups seem to stand out, of course. There has been fair activity in the mid-price segment, whereas the length of e-commerce has made it much easier for smaller fashion brands to build their distribution. However, I see the challenge at the PE level i.e. Growth capital for more mature companies. There have not been too many good transactions that have come around over the last 12 months.”
There has been an interest from the investing community per se; however, different sections of the industry are seeing a different kind of traction right now, as per him. Demonetization (DeMo) and Good & Services Tax (GST) are the two main reasons behind the dip in the funding activity in 2016, notes Partner, Deloitte India, Anil Talreja.
“A sector normally grows out to be attractive and a lot of investments are made by November-December. However, last year, this period was marked by DeMo. GST was already on cards, but there was a lack of clarity and general apprehension that the rates will be on the higher side. This also made foreign PE/VCs wary.”
The aforesaid events have caused some level of disruption or disorientation in the fashion space also, having taken some sheen off the sector at least in the short term.
“Consumers as of now don’t want to spend a lot on fashion and luxury because it is not an essential,” he explicates. He also thinks that the GST rates are pretty high, and such scenario is likely to impact the fresh investments also.
Angel and seed stage investment activity has slowed down too, tells Prajakt Raut of Applyifi and The Hub for Startups. The raison d’être, according to him, is that a number of folks who ‘wanted to see what angel investing is’, are now off the table.
“There are however a number of individuals who are keen to explore angel investing as an asset class, and that is evident from the increasing membership of regional angel investor groups in places like Coimbatore, Madurai, Jaipur, Indore, Nagpur, etc. As these forums mature, they will be a very important stakeholder in the startup eco-system, and will be a source of capital for startups,” he affirmed.
The Learning Curve
PE and VC investing is relatively a new phenomenon in the Indian business environment, and so is seed/angel funding – the investors and the investee companies are in the early stages of the learning curve.
According to Founder & Managing Partner, IvyCap Ventures Advisors, Vikram Gupta, the investments made in the fashion sector so far have been a mixed bag of success and failure. However, the failure in terms of numbers and value is larger than expected. “Many fashion companies that are not doing well are primarily driven by discounts and high customer acquisition cost, and the overall cost of delivery was also more than the expected pricing points. Investors have become more cautious now and will not invest unless they are able to see positive margins and cost efficient business,” he avers.
In his words, the last 2-3 years have clearly impacted the overall investment approach. There were cases of large-sized investments at very high valuations, and the subsequent failures affected the other investors’ sentiment.
MOPE’s Amit Choudhary recounts that a lot of companies/ startups mushroomed in the early 2012 and through 2013 and 2014. People got a little carried away on how much growth is possible in a short period of time by any company with seemingly infinite resources. Secondly, valuation expectations of some of the companies had also gone through the roof, as to what they expected out of a good idea/ plan. He now sees a bit of semblance coming back on table – people understand what it needs to be successful as a startup in these spaces or even at a late stage. Moreover, what he calls a “brand premium” has also started drying up.
He describes, “For a buyout fund or if a separate company is buying out another company, there is potentially a merit for paying a huge brand premium. For an investor, there is a little value attached to intangible assets especially at inception stage of companies unless there is a huge conviction that the idea/ brand will scale up dramatically. Now both investor and investee companies have realised it is very difficult to quantify and value this “brand premium” – especially for mid-sized companies. However, measuring the genuine brand value is still an underappreciated art.”
Fashion is a very glamorous and flamboyant industry and is doing well also; however, I would advise a bit of caution in the current scenario, says Anil Talreja of Deloitte, adding “DeMo and GST have created a sought of speed breaker. I don’t think one can go back to 2015 days very soon and need to look at how the factors are going to turn after the most of the after effects of DeMo are done with. Businesses and investors are now looking at ways to start afresh. Soon we’ll have GST implemented and the industry will have to come to terms with the finalised rate structure.”
Online/ Offline Conundrum
With e-commerce gaining more depth and width in India, the online fashion startups have emerged as an investor favourite. Offline businesses, however, are a bit laggard on this front, especially at the early stage.
IndigoEdge’s Shivakumar says, “We are at a very early stage when it comes to online brands. However, the early signs are very promising. Some of the leading online brands are able to get to a base scale very quickly which is very exciting to investors. Online brands also have some of the inherent characteristics with regards to capital efficiency that excites investors.”
Fashion manufacturing and retail businesses are capital-intensive. Can this be a plausible deterrent for investors? Not really, tells Amit Choudhary (MOPE), and goes on to explain, “Regardless of the sector, I think for us and probably most of the investors, the focus and the efficient use of capital are the key questions. There is nothing wrong with a capital-intensive business, as long as one can derive value out of the capital deployed and get good returns. In our experience, this is where many fashion brands in India sometimes lose track, especially when they scale up their business. The biggest trick is to remain capital-efficient while scaling up. Not many businesses are able to pull this off. However, we have some companies that are doing well but are less capital-efficient. A capital efficient company may also have to struggle sometimes. So, the idea is to find that sweet spot. For us as investors, it’s important that a company is capital efficient and can sustain the same over a period of time.”
For offline businesses, angel and early stage investments are unlikely. Applifyi and The Hub for Startups’ Prajakt Raut clarifies, “Some sectors require a lot more capital than that can be provided by angel investors and seed stage investors. For instance, for someone starting a manufacturing business, angel investors and VCs may not be the right form of capital.”
IvyCap Ventures’ Vikram Gupta asserts, “Offline and online will now need to move together. Of course, online growth happens much faster once a minimum threshold level is achieved. Further investment is needed to fortify its foundation. In offline, the investment requirement depends on the business model, whether it’s company-owned stores, franchised stores, or store-in-store model. Accordingly, the investment terms may also be different.”
He also feels that moving from online to offline is fairly easy than doing the other way, “Online business typically requires the owners with technology mindset. New age entrepreneurs mostly prefer online ventures, whereas offline businesses are generally run by old mindset people who are necessarily not that tech-savvy, therefore, the transition becomes a bit difficult.”
The Course Correction
There have been numerous success stories, yet the learnings gleaned from the past experiences call for revisiting and refining the investment approach. This will also help align with changing investment landscape.
“Investors would now look for multiple points of validation in any company, including quality of the team, superiority of the business model, evolution of the business demonstrating the business model would all be essential in all circumstances,” underlines Shivakumar (IndigoEdge)
The investors have become more disciplined and organised in terms of what to expect out of an investment idea, says Amit Choudhary (MOPE). In a complicated environment, not all problems can be solved by throwing more money – there are things that take time, such as building up distribution and brand. In the fashion industry, many of the things are very intangible; therefore, creating something from thin air by putting in more money will not work most of the time. This realisation has started coming back to both the investors and investees, and they are recalibrating both expectations and delivery potential.
About high cash burn rates, he affirms “As a fund house, we do not invest in such ventures.” However, on a broader point, he thinks that till the time the idea is brilliantly executed, some degree of cash burn at the initial stage is fine. The key is to know how the business will make money at some point in time (nearer the better).
Gross Merchandise Value or GMV being a key parameter for fund-raising and sky-high valuations are passé. Vikram Gupta (IvyCap) emphasises that investors are no more interested in the top line or GMV numbers. They want to look at the bottom line value addition in a business. The horizontal story has already played out in the fashion sector, whereas vertically, there is an opportunity on a case by case basis. He further adds that there is now also an opportunity to build brands, which requires substantial capital/investment. If a brand is being created from scratch, it’s important to create enough brand awareness, or else further investment (VC/PE) becomes difficult. A fashion business with a gross margin of more than 50 per cent will have a better chance of fund-raising.
Evolving Business Landscape
India will be an interesting arena in the next few years for fashion retailers, and they will be fighting for consumer footfalls and conversion of potential customers, feels Prashant Mehra from Grant Thornton. However, he also adds, “Besides the success and failure of fashion brands, what will remain to be seen is the patience and endurance of these brands because shopping in India is still viewed as a means of entertainment and not a lifestyle. In the last decade, a number of brands in India have either packed their bags for exit or have restructured their partnership and market strategies. A fundamental reason has been that while these brands devised their strategies with only cities like Delhi and Mumbai in mind, their forecasts were using the national macro-economic data and soon they realised that doing business with India is much different from doing business in Hindustan.”
The evolving business scenario throws both opportunity and risk for investors. According to Shivakumar (IndigoEdge), the opportunity for PE/VC investors lies in the fact that young brands are provided with a market by online platforms. The perceived risks remain around the sustainability of the offline EBO model where the companies take on a high-cost real estate in order to gather eyeballs and the risk of obsolete inventory in traditional models.
“Anyone who can increase the inventory turnover to > 5X will be very interesting for investors,” he says. Many international brands have third party manufacturing in India. Shivakumar foresees that contract manufacturing is unlikely to see a revival in investments any time soon. Any downturn in the consumption markets affects the local manufacturers considerably. The overall global retail outlook has not been very positive and therefore status quo is likely.
Omnichannel the way to go: While the online vs offline debate continues, the Omnichannel model has emerged as a real winner, where in the companies are able to leverage the best of both worlds.
Recent years have seen increasing number of fashion retailers entering the e-commerce realm. Even the leading, long-established companies have launched their online operations. Whether Aditya Birla Group, Arvind Limited, Future Group, Landmark Group, Reliance Industries, Tata Group, or Shoppers Stop Limited, they all are tapping the Indian fashion e-commerce space also to supplement their physical presence. At the same time, likes of Yepme, Lenskart, Pretty Secrets and Myntra, who started as online ventures, have expanded their offline presence as well.
Luxury market still nascent: The super premium and luxury fashion in India is yet to take off, although the segment has registered some PE activity. Amit Choudhary from MOPE says, “There are few ideas in place, but in India, luxury play, especially in fashion, has not really scaled up very well. There is a challenge for an investor as to how to find value here. There are only a handful of international luxury fashion brands in India, that too with limited presence and still trying to figure out a way of marketing their brands in India. Shivakumar of IndigoEdge agrees that Indian luxury goods retail market is still a very small market.
As per him, “The consumption of high-end luxury has been limited to top 2-3 cities. Luxury retail will remain subdued till our per capita GDP increase 3X. We see the majority of the growth coming from the mid-premium segment with a lot of the global brands trying to attack the segment. We have seen early success for the likes of Zara, Gap and H&M while established players like UCB, Levi’s also continue to expand.”
“We have seen PE/VC investment happening in beauty, jewellery and lingerie brands. However, the challenge in the online luxury fashion retail is the big ticket size. Consumers want to touch and feel the product before buying even more as the ticket size of the product increases. It will take a little longer for online businesses, as far as the high-priced items are concerned,” opines Vikram Gupta (IvyCap).
Of late, luxury fashion startups, namely Exclusive and Envoged, received angel and seed investment respectively. “Angel investors will invest in any venture where they believe that their capital will be sufficient to take the venture into a different orbit, where the next round of investors will find it interesting to provide follow-on capital,” explains Prajakt Raut (Applyifi and The Hub for Startups).
Emerging regulatory environment: The present regulatory/tax environment in India is fairly conducive for PE/VC, according to Deloitte’s Anil Talreja. “However, we will have to see the impact on the profit margins and EBITDA post-GST. Once GST is implemented, in a couple of months thereafter, we’ll know how it will have played out. I think, by the next financial year, we’ll see things settling down”, he tells.
Amit Choudhary (MOPE) is positive about GST. Things will become much more organised and the companies will go through more cost efficiency because of supply chain efficiencies coming in. We might see a lot of activity on the investment side once things become clearer on timelines, etc, says he.
About GST, Prajakt Raut (Applyifi and The Hub for Startups) says, “The government’s intent is good. Progress is slow but on the right track. It’s good that the government is also engaging with industry stakeholders. Any policy and infrastructure that makes it easier for entrepreneurs to operate and succeed will be welcomed by angel investors.
Shivakumar (IndigoEdge) notes that India has a complex policy and legislative structure as regards investing in multi-brand retail including e-commerce. As per him, the new Companies Act has actually made it more complex for young companies to operate. A single window approval process across legislations and few compliance requirements are needed. GST is a step in the right direction for the economy at large. However, independent licenses in every state and filing of multiple returns will remain a problem for companies that choose to expand fast.
FDI in fashion on rise: FDI landscape for retail has evolved since 1997. The key factor has been the opening up of foreign direct investment in singlebrand retail and cash–and-carry formats. Many single-brand fashion retailers like Louis Vuitton and Tommy Hilfiger were the first to take advantage of this opportunity. Recent brands to join the market have been Zara (2009), H&M (2015) and Gap (2016), apprised Prashant Mehra (Grant Thornton). According to Anil Talreja (Deloitte), the foreign investors would like to see the kind of valuations they get pursuant to GST and EBITDA. They might prefer the franchise route as against absolute investment.
Changing Investment Dynamics
Investing is becoming more realistic in terms of valuations, etc. There is a little bit of stress when it comes to later stage investments. After Series B, finding investors who can support the next round is a challenge, shares Vikram Gupta of IvyCap. He also highlights that domestic fund raising is very less as compared to foreign sourcing. Unlike Indian investors, who want quick results, foreign investors have a long-term horizon, and that is why we see more dollar money coming in as an investment. Moreover, of the 10 billion dollar PE/VC investments so far, there has been hardly any good return. Until some good examples are set, investors will observe caution.
Valuations cannot be high for some time now. The industry will need time to recover from DeMo and GST impact; though former is not much worry now. Investments will take some time. Fashion is always an underdog – the differentiation lies in the fact that it is not an essential, but more of desire, or aspiration. One always has an option of putting a desire on halt. In short term, we won’t see much movement investment wise, feels Anil Talreja of Deloitte.
As per Applyifi and The Hub for Startups’ Prajakt Raut, angel investors do not take sectoral bets or positions. Angels typically invest in ventures across sectors, and where they believe that the founders have a clear plan and a reasonable chance of becoming a dominant player in a large market. Valuation has always been a tricky aspect. Entrepreneurs nowadays should expect to dilute 10-30% in early rounds.
According to Prashant Mehra (Grant Thornton), the current and expected real estate correction along with economic reforms such as GST and infrastructure development schemes will also offer the brands and investors an added incentive to stay invested in India. Investors want good returns and profitable exits.
“Exists are always challenging and very few and far between. For angel investors, it does not matter where they get an exit from. However, with VCs now going back to Series A and above investments (and not seed stage investments that they had started dabbling in), exit opportunities for successful ventures should increase,” opines Prajakt Raut (Applyifi and The Hub for Startups).
About the fashion companies taking the IPO-route, Amit Choudhary (MOPE) says that the public market is now fairly receptive to these [fashion] ideas. However, he also thinks that an IPO doesn’t make sense for a company with less than Rs 1,500- Rs 2,000 crore valuation, i.e. primarily for a mid-sized company but it comes with the legal requirements as well.”
As per Shivakumar (IndigoEdge), any late stage investor would love an IPO as an exit option subject to the investee company having an adequate float, liquidity and volumes, and market capitalization. Any IPO below an Rs 1,200 – Rs 1,500 crore market capitalization with < 40 per cent float would make it difficult for an investor to get an exit. Most of the successful exits in the fashion space have been to PE funds with TA acquiring Matrix’s stake in W, General Atlantic buying out Kishore Biyani’s stake in AND. Barring Tanishq’s acquisition of Caratlane, we are yet to see any major buy outs in this sector, he notifies.
Vikram Gupta (IvyCap) anticipates there will be more cases for fashion company IPOs in the coming future. PEs are also looking at merger and acquisition (M&A) as a potential exit, however, at VC level, one wants more options and more comfort, he tells.
According to Anil Talreja (Deloitte), secondary sales are largely popular among PE, while there are very few IPOs in the fashion industry. As of now, valuations seem quite uncertain, and IPOs will not take off so soon. We may see some M&A activity in this sector. Over the years, the Indian fashion sector has experienced some M&A activity as well.
A few recent M&A deals in fashion include: Aditya Birla Group merged its apparel business units to create India’s largest branded clothing company, ABFRL; German sportswear giant Puma acquired the entire stake of its local partner from their joint venture, making Puma India Retail its fully-owned subsidiary; ABFRL acquired the Indian business of fashion chain Forever 21 from the US-based company’s local franchise partner; Tata Group owned Titan Co Ltd, bought a majority stake in India’s largest jewellery e-tailer; Flipkart-owned Myntra acquired Jabong to create India’s biggest fashion e-tailer.
The Way Forward
So what is the outlook for funding and investments in the Indian fashion sector in 2017 and beyond?
“Entrepreneurs who innovate to create share-of-mind for their brands will have a good run, and will also be able to get investor interest. Just any business with a traditional marketing and brand building approach of outshouting competition is not going to be of
interest to investors, even if the product is great,” feels Prajakt Raut (Applyifi).
“Any fashion brand which can offer fashion and variety at an affordable price and sees itself as more of a national brand rather than only a metro city brand will perhaps take the lead. Such brands/companies will attract investor interest also,” states Grant Thornton’s Prashant Mehra.
“The Fashion sector seems promising for the long term. We’ll also have to see whether there is any counter [Government] announcement to balance out the downside of DeMo and GST and if there are some more announcements in the future that can give a boost to the sector,” emphasises Deloitte’s Anil Talreja.
Shivakumar of IndigoEdge maintains, “There will always be waves of investing at the early stage, driven by successes of similar ventures. The Indian fashion sector will always see interest if the brands demonstrate Omnichannel capabilities (Large format/ Multi- Brand Outlets/ Exclusive Brand Outlets and Online).”
IvyCap Ventures’ Vikram Gupta affirms, “Offline and online will now need to move together. The stage is set for the Omnichannel models. The investors will be more interested in the Omnichannel models, or the business that has plans to go the Omnichannel way eventually.”
MOPE’s Amit Choudhary concluded by saying, “The whole game around fundraising for scale (GMV) and that the scale will get more money is probably over. The companies must have tightened their belt, figured out their business model and the execution strategies. There is money to be raised, and I don’t think there will be a situation for the right company to not be able to raise capital in 2017, or afterwards!”

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