How to Raise Venture Capital That Matters

On May 23, 2022

Last July was officially the summer of Glossier. In the hot, sticky months of 2021, the global beauty phenomenon was sparkling off a $80 million Series E round that valued the company at $1.8 billion, a figure more characteristic of a Silicon Valley software startup than a buzzy cosmetic company.

But the landscape was changing. Since the onset of the COVID-19 pandemic, a new spate of fashion and beauty brands — Outdoor Voices, Vestiaire Collective and SKIMS among them — had announced deep venture capital investments to level up their businesses. Glossier, for one, was set to introduce a series of extravagant new brick-and-mortar experiences, angling to build brand awareness in markets from Seattle to London.

By the end of 2021, however, the company’s U.S. sales decreased by 26 percent, year over year, according to Bloomberg Second Measure. “We prioritized certain strategic projects that distracted us from the laser-focus we needed to have on our core business: scaling our beauty brand,” CEO Emily Weiss wrote in an internal email. “These missteps are on me.”

Critics alleged that Glossier fell victim to what those familiar with the venture space call the “curse of capital,” a consequence of raising too much too quickly, overspending to the point of teetering unprofitability and left more vulnerable than investors initially bargained for. Because the thing about taking in cash is that, one way or another, you have to make it back.

What we’re here to tell you is that the curse of capital is nearly avoidable. Venture funding is already intimidating at best and for the vast majority of communities, entirely inaccessible at worst. So we spoke to experts to compile this blueprint on how venture-backed fashion and beauty brands can raise capital that matters to secure authentic, long-term growth.

The Direct-to-Consumer Flameout

In the high-octane world of venture capital, where breakdowns like Glossier’s are baked into annual profit and loss statements, brands don’t become success stories overnight. This is particularly true as it relates to fashion and beauty, sectors that took years — decades, even — to reach legitimacy among the stale old boys’ club of private financing.

“No one was investing at all in these industries 20 years ago,” Thomaï Serdari, adjunct professor of marketing and director of the Fashion & Luxury MBA at New York University’s Stern School of Business, tells me. “And that wasn’t fair at all because people who had a good idea were just starting their businesses with angel investing or not even, with friends and family.”

But that doesn’t get you anywhere, not really. If you really want to grow a business, she says, you need heavy investments — though the more money you accept, the less control you retain. And that’s where things can go wrong.

According to Dulma Altan, the founder and CEO of Makelane, a private community for female founders, venture capital is rarely the right mechanism for direct-to-consumer companies, largely because the financial underpinnings of physical goods differ from those of software or technology. Few consumer brands can have the kind of exponential growth — and ultimately, the scale and the return profile — that a typical software company can. But because financing options are still limited, founders continue to turn to venture capital because they have nowhere else to go.

When Glossier raised its $8.4 million Series A round in 2014, venture money was all but sprouting on trees. By 2014, the number of unicorns around the world hit 90; today, that number surpasses 600. Just look at Facebook ad costs as your tea leaves: Between the years 2012 and 2016, the now-embattled platform’s Costs Per Click (CPC) reached a critical low, leading investors to believe the party would go on forever.

“It seemed like these companies were going to be able to deliver a return to investors, so they were plowing those dollars into paid ads and ramping up headcounts in a way that was aligned with the expectations of venture capital,” Altan, who has built a 66,000-strong TikTok following through her analyses of consumer brands, explains. “But eventually, that turned out to be a house of cards.”

Consider one-click checkout startup Fast, which launched in 2019 with charismatic executives and the promise of a “frictionless” checkout button. In January 2021, it landed a $102 million investment led by financial services giant Stripe only to close up shop just 15 months later, having burnt through investors’ cash; it raked in just $600,000 in revenue in all of 2021.

“At a high level, venture capital is a really powerful vehicle,” Altan adds. “It’s basically rocket fuel, and rocket fuel is perfect for rockets, but it’s not perfect for a car. It’s not perfect for a train.”

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A Clear Path to Profitability

Today, brands can break the capital curse with one thing: a clear path to profitability. This is difficult, particularly now, but it’s not impossible.

For investors, Skims is the rare sure thing, the investment world’s star student whose unique value proposition has made a billion-dollar business.

“There was a time when it was more feasible for fashion and beauty brands to have return profiles that came closer to tech companies,” Altan says. “But now that it’s clear that’s not the case, it’s really important to raise capital from investors who are aligned with you as far as your vision on how to thoughtfully grow your company and deploy that capital.”

Which is to say, brands shouldn’t leap at every investment proposition, even if the figure in question is mind-numbingly huge. It’s a quality-over-quantity situation, with the former winning out each and every time. At minimum, this entails partnering with firms with proven track records in the sectors founders wish to play in, where investors know what thoughtful growth can and should look like in theory as much as in practice.

“My take on good agreements between entrepreneurs and venture capitalists is to make sure you have the same values in business, and that the product, the company and the people on both sides are aligned in terms of these values,” Serdari says.

It’s why “generalist” firms — like Benchmark, an early investor in the likes of Uber, Tinder and, interestingly, Stitch Fix, which famously went public in 2017 — aren’t always a great fit for fashion and beauty companies. Serdari explains it’s a similar approach to what sometimes happens in the stock market, wherein investors will seek out specific startups addressing general trends in the marketplace. If the success of Allbirds has prompted a boom in eco-friendly sneakers, surely there must be a competing brand that can serve as a viable alternative, right? This may be a successful strategy in some circles, but it leaves little incentive to push for thoughtful, personalized growth.

Enter “specialist” firms like Imaginary Ventures, which invests in early-stage opportunities at the intersection of retail and technology in the U.S. and across Europe. Net-a-Porter founder Natalie Massenet launched Imaginary with veteran fashion-tech investor Nick Brown in 2018, and the pair have since built a portfolio full of high-brow industry challengers, from Ami Colé and Farfetch to, naturally, Glossier and Skims. Its third fundraise totals $500 million, bringing the firm’s assets under management to $1 billion.

“Imaginary is one of these companies that does have a long-term vision, and they truly act as advisors,” Serdari says. “Natalie Massenet doesn’t invest unless she thinks the company has potential, that there’s a mission and that they’re aligned in terms of purpose.”

A Corrective Course Ahead

The days of multi-hundred-million-dollar investments may be fewer and farther between, but there’s still money to be made. It’s just that investors may be more cautious about how and on whom they spend it.

“We’re seeing a correction on a macro scale in the venture industry, even on the part of investors who are now becoming a little bit more conservative with respect to how much lack of profitability they’re comfortable with,” Altan says. “That’s probably the biggest thing we’re going to see investors prioritizing moving forward as the market starts to correct itself.”

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