Investing in a clothing line

Posted by Kathleen Fasanella on Dec 6, 2007 at 9:20 am / Newbies, Operations, Reviews, Slavery or Bravery / Trackback

I’ve been cleaning up around here again. Happily, I found an old notebook containing blogging ideas that I’d been looking for forever. Sometimes I have so many story ideas that I don’t know where to start and being overwhelmed, end up posting something less than my best efforts. Anyway, this is an interview that I did with a DE who we will call Bobbie. It is about a partnership she had with an investor -we’ll call him Sam- who was backing her. The relationship ended poorly. Bobbie feels you can avoid some of the pitfalls of their relationship and says she wishes she’d paid more attention to her gut but admits she was just so happy to find an investor.

Bobbie is a self-taught, young, vivacious, talented designer with a diverse artistic and media background. Previously she’d owned an art gallery in London and developed a cult following as a custom accessories designer. People -and the media- are drawn to her, she’d been profiled in Lucky, Nylon, Elle, and WWD. Following these successes, she came to meet Sam through a friend of a friend. Sam was looking for an opportunity and they decided to team up. It was then that Bobbie began to develop her eco contemporary line.


Sam was Bobbie’s angel investor. She describes him as a trust fund baby with a strong work ethic, being willing to work hard to achieve based on his own merits. He is intelligent and educated (MBA, finance); a respected professional with integrity. At the time of this interview, Sam had experience backing projects in finance and technology, although none were any kind of manufacturing.

She says they started with a two year business plan that listed their stakes (this was all finalized legally; Sam also paid for her attorney). Up front she got a lump sum to cover four to six months of budgeting and planning. Part of the funding outline included an assistant (also did R&D on sustainability). Her stake was 30% ownership which included a full time salary. When she was ready to debut, Sam funded a $15,000 launch party at St. Regis. She says things began to fall apart after Sam got a girlfriend, things became too stressful and he was pulled in too many directions because he had other projects to manage. In the end, they were under capitalized by $50,000. The big fall out occurred when he failed to pay a contractor for an order to Barney’s and four other stores.

Bobbie says there are core problems in dealing with investors coming from outside the industry -not just Sam. Investors don’t know the business of manufacturing much less apparel. They don’t understand schedules, cycles of trade, or dependence on your market. She says that investors should know that investing in a clothing line boils down to funding an art project for three to five years because it often takes four years to develop a consistent customer base. The biggest drawback is that the most investors think when investing in any kind of manufacturing venture, is that they can fund a widget that will sell through out the year(s). Investors in apparel manufacturing fail to understand the multi-times yearly that a fashion line must change and the burdens and costs associated with ongoing product development.

I asked her what she could have done better. She said three basic things:

  1. They should have been better organized in ways to define the structure of checking in with each other. She says this in spite of them talking every day. You have to check in with your partner using firm grounds, structured, with long term goals of where you are. You can’t do it by phone. You need to sit down with paper at a structured meeting. She says that even if there are no warning signs, you have to sit down and talk.
  2. Defining a clear exit strategy. All relationships end sooner or later. Even lifelong marriages are severed through death. You need to be clear about conflicts or problems with clients and vendors to be sure you and your partner are acting with integrity towards them.
  3. Surprisingly, Bobbie said getting an investor and having the money was a problem. She said money can be a dynamic creative force, it creates possibilities, making a dream viable. Money can create excitement, it’s liberating and exhilarating. Bobbie says to tone down the excitement.

I couldn’t resist asking her if she’d do it all again. She said yes but she’d be “black and white about it and money isn’t”. She says “you will change, face it. You can’t be afraid of maturation in the continuum of your own development”. She’s not even thirty. I’m still not that wise.

Then I asked what she thought Sam could have done better.

  1. He didn’t do his own research.
  2. He didn’t define what his one to five year goals were.
  3. He didn’t communicate his fears and frustrations with the project.

Then I asked her what she did wrong (slightly different responses from “what she could have done better”):

  • In spite of having an attorney, she wasn’t well protected in terms of an exit strategy. She says she should have licensed so the designs belonged to her rather than the company.

  • She didn’t check in with herself (money excitement) to see how her own goals were changing. She says her willingness to take certain risks evolved and she wasn’t aware of it.
  • She says she didn’t trust her instincts. She says that her gut said things were changing with Sam but she didn’t listen. She gave him the benefit of the doubt when she shouldn’t have.

She stops me here to reiterate about the downsides of partnerships with investors. She says she knows how you must feel. An investor can be a protector, your salvation and your future but this is a facade, fronting and denying harsh realities. If it starts to feel funny, listen! Don’t assume it’s been addressed because you’ll keep adding on to that pile and things will only get worse. An investor will own a part of you, your core.

The conclusion of the partnership
Lacking a clear exit strategy, they went to arbitration. In the end, she ended up with the label name, the designs and concepts. In return, for Sam’s 70% stake in the venture, he gets 25% of the profit on anything apparel related that Bobbie produces annually, until $300,000 is repaid. After that, it’s all Bobbie’s.

Bobbie says she did create one loop hole for herself in arbitration; that Sam only got a profit percentage of apparel, accessories weren’t included (she’s a former accessories designer). She said she didn’t do this to cheat Sam but as a buttress to live on while things are tight living and working in New York.

Related entries:
Partnerships
How to find investors for a clothing line

5 Responses to “Investing in a clothing line”

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Aimee
December 6th, 2007
11:32 AM

Kathleen,

My Business partner and I have been an avid follower of your blog and I have to say this paticular blog has impressed us to no end. We too have been facing very similar problems as we are working with our investor. Although I wish this were not the circumstances it’s wonderful to know we are not alone out there and others are experiencing similar problems and have succeeded through them.

Thank you for your post.

Regards,
Aimee

Mike C
December 6th, 2007
12:12 PM

Sam sounds remarkably unsophisticated to be investing large sums of money.

She ended up with the startup funding, ownership of the company and all its assets, and just has to pay back $300,000 out of “profits?” (Is it really *profits* – or is it some other, harder to game, metric?)

The norm is that the investor owns everything, your equity is rendered worthless, and they kick you out on your ear. If they think they need you to succeed, they renegotiate a deal more favorable to them.

Rachel
December 6th, 2007
3:21 PM

I thought this was an amazing post. Thank you.

Lisa B.
December 6th, 2007
3:33 PM

Wow! Great post! [filing away for future reference]

Sometimes I have so many story ideas that I don’t know where to start
I know what you mean because I keep getting ideas for novels like that. :-)

Thanks, Kathleen! Happy Hanukkah! Hag Samei-akh!

J C Sprowls
December 6th, 2007
7:31 PM

To Mike’s point, there may be more backstory than we can know. I agree, the deal this DE walked out with seems generous compared to what some of us have seen or experienced. The moral to take from this, though, is that seeking investors is sticky business. You’re getting ‘in bed’ with them for some length of time – perhaps longer than is comfortable.

If you’re not in a position to articulate an exit strategy, and if you can’t (for whatever reason) look at your partner to say:

This is how ugly things can get. I’ll do X, Y and Z to manage ugliness. What will you manage?

Then, you’re not ready to negotiate, let alone close the deal.

I think it’s worthwhile to watch the Dragon’s Den and learn from others’ experiences. The deals the investors salivate over aren’t ones for mentoring and developing businesses. What money or glory is in that? Investors are looking for something they can takeover, mangle, turnaround and then sell off. Watch closely: investors stick to their industry because they have inroads that let them exit their deal. They walk in with an exit strategy.

What’s interesting to me – and I know I’ll never see it on TV – is what happens after desperate people accept desperate deals? Remember how some snickered when Jay from Project Runway turned down the prize money? Did he exercise foresight? Was he a more prudent business person for not being too eager for a deal?

Whatever happened to that party planning woman after she accepted the offer from the Dragon? When she was leaving, he was convincing her that the gift basket business was where she belonged? Really? She didn’t look happy about the idea of become an hourly basket stuffer… Heck, she could’ve earned more flipping burgers at McD’s with a whole lot less responsibility. Do you think she declined the offer after the drive home?

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