This post is part of my Startup Review series of posts, where I provide a review on seed/early-stage companies based on publicly available information and following a predetermined structure.
Introduction
garmz is an Austrian-based startup that allows fashion designers to post their designs on their website, where users will vote for the best designs. Best designs will be produced at low cost using the designer’s brand and sold via the garmz website, with a fraction of each garment sold reverting to the garment’s designer. In essence it uses the crowdsourcing concept you can find at iStockPhoto applied to the fashion industry, but with a higher degree of designer ownership/freedom.
Product/Technology
garmz has put some effort into creating an easy to use website. As a designer you can upload your designs using the garmz-provided kit and create your fashion label in three easy steps. At this stage you can’t really understand how the user experience will be for voting and browsing through the garmz shop, but I would expect a lean website you’d enjoy using.
garmz’s tech infrastructure should be straightforward, with no particularly heavy data processing and very much akin to that of an online fashion retailer with additional requirements for voting and uploading. The technology should be easy enough to adapt to new requirements with little effort, but difficult to apply in other contexts.
garmz’s technology isn’t particularly innovative, with disruption efforts focusing on the business model instead.
Market Opportunity
The fashion industry supplies to a huge market and garmz wants to play in this field. garmz aims to be an online fashion retailer with access to a huge pool of fashion designers so it can have original garments that are found nowhere else. Instead of garmz’s team selecting which designs should be manufactured and added to their store, their reasoning is to allow users to vote and provide feedback, as votes/interaction would be a good proxy for future purchases.
Is this a good reasoning though? Brands, department stores and other large retailers dominate the fashion industry and all have an online presence as well. Necessarily, garmz should aim for a niche market and leverage long-tail effects to make revenues from original designs that have little resemblance to what else may be on the market. However, niche markets require tightly segmented customers: if you ask users to vote for designs, you should expect the most voted designs to actually be closer to mainstream, where garmz is less competitive. The niches that would actually do more in differentiating garmz’s selection from other online fashion retailers get the fewer votes and aren’t produced. Who are garmz’s real customers after all?
Even though, from a top-down view, the market opportunity is huge, I’m not really sure, from a bottom-up view, whether garmz can truly innovate and come up with a value proposition that attracts a sufficiently high number of customers for them to make any decent money. Scaling up garmz, meaning increasing the number of active designers+users using it, can be done through viral marketing, social networks, online advertising, etc. – but only if the products are interesting enough to keep customers coming in, otherwise it’s hard to sell anything and advertising costs escalate. Given all of this, I’m not sure there is a clear need on the market for garmz’s offering and I’m not sure there is a business opportunity here.
Business Model and Value Chain
After voting, garmz produce up to 150 pieces of a given garment. Designers get to choose their profit over the product’s cost (where, I’m assuming, garmz gets somewhere between 25-50% gross margin, which is their sole revenue stream), which is then sold (B2C) on their store. The example they have on their website (where they recommend 5-10 EUR margin for the designer) is the following:
Fixed costs: 68 EUR
Designer’s decision on his/her profit margin: 7 EUR
Final price in webshop: 75 EUR
Batch size: 100 pieces
Designer earns (when sold out): 700 EUR
Let’s imagine that garmz have a 25% margin on the product’s fixed cost, meaning, in this example, 17EUR per piece sold for garmz. For a batch size of 100 pieces, they make 1,700EUR gross margin and 7,500EUR revenue. This means that, in order to get 1M in revenue, they need to produce – and sell the entire 100 pieces of – 133 different designs (or additional batches of the same designs) at an average retail price of 75EUR+shipping. This seems difficult without having an established brand, products who strongly resonate with currently poorly served (yet sufficiently large) customer segments, a well-oiled distribution channel and adequate pricing.
There may be potential, however, for garmz to drop their online shop altogether and focus on partnering with established online retailers, either through their own garmz brand or through a co-branding garmz+designer label. They would position themselves on the design section of the value chain, where they seem to be more comfortable with, and leverage on existing distribution channels (at a cost, of course) to sell faster and grow faster. Otherwise I don’t see any alternative other than garmz to focus on a set of customer niches and make sure submitted designs strongly resonate with these customers.
Market Traction
garmz is pre-revenue, so still has no market traction. Marketing efforts will focus on increasing the number of active designers + users through the means we already know. How can garmz gain market traction? They will likely need to focus their efforts on attracting trendsetters and opinion leaders to their website, include them in their social networks and leverage all free PR they can get. They shouldn’t have the budget for anything more massive than that and so a lean, sophisticated marketing strategy needs to be implemented.
Competition
garmz has tons of competitors. While it may be true that there aren’t any crowdsourced fashion design online stores out there, there are plenty of fashion labels, online, in department stores, high streets, shopping malls spending their dollars in attracting more and more customers. garmz’s industry, as they are currently positioned, is fashion retail, which is a dangerous place to be. Should they focus instead on fashion design they may not be much better off, but they will have more room to add value and differentiate themselves.
Team
There are 11 people working at garmz. Given that they have Angel funding “in the low six figures range”, this seems a heavy cost structure to have when you’re still pre-revenue. While the team may have complementary skills, I find it hard to understand why would they need such a large team in the first place: tech infrastructure seems simple enough, business/marketing should also be relatively straightforward (as long as you manage supplier relationships appropriately). I would expect a team 30-50% of the current size for this particular business.
Financials
Again, let’s go back to the team. 11 people working at garmz, funding “in the low six figures range”. Assuming conservative salaries of 25K/person/year that’s 275K/year in personnel costs alone – which should be close to the funding they’ve already received. Let’s imagine, very optimistically, 20K/year more for any additional costs (including marketing!). This means they will break-even at 173 batches of 100 pieces @75EUR, or roughly 1.3M revenue. Still, at 10M revenue, assuming their fixed costs stay as they are, they would make near 2M EBITDA, which is not too bad, yet not overly exciting. As in reality their cost structure doesn’t seem very scalable, it should be less, making it a less interesting investment for IRR-hungry VCs.
Working capital will be an issue, as they might have to tie down capital to produce their designs – taking months to recover. A close partnership with manufacturers and ideally risk-sharing will be helpful. Necessarily, with short funding available, cash flow will be an issue as well. They will need to keep close eyes on financials until the company takes off.
There is no way garmz can stay in business too long without closing another funding round, ideally near the millions range. They have a heavy cost structure, need a great, somewhat expensive advertising strategy (typical of B2C) and need to finance working capital. Doing so at a pre-revenue stage might be difficult, however, particularly from VCs – so they might be looking for another angel round.
garmz’s exit strategy, should they make enough revenue, should be a strategic trade sale to a well-established online fashion retailer. That seems their best fit and, should they play their cards right, might not be too difficult to come by. There should only be a handful of fashion retailers who are a good fit (i.e. multi-brand), so relationships can be built early on.
Conclusions and Challenges Ahead
I don’t think garmz is VC-backable unless they do the following:
- Make sure their designs actually serve specific niches of the market that are currently poorly served (e.g. a sufficient number of votes would get them produced, instead of only top voted designs)
- Secure a high number of active designers/users using as little financing as possible
- Focus on partnering with other multi-brand online retailers to sell garmz-branded/co-branded designs, instead of using solely their own shop
- Optimise team and focus on having a leaner structure
garmz aims to tend to frustrated fashion design customers, but needs to do so carefully and making sure they are adding as much value as possible. They need a clear understanding of which segments are really “frustrated” with current fashion offerings and attract to their website designers who can tend to these customers. As it stands, garmz’s value proposition isn’t clear, isn’t game-changing or disruptive and so it’s difficult to believe they will become the fast-growing profitable business that can deliver on VC’s IRR expectations. garmz’s team, however, will certainly execute on their strategy and have a couple of surprises up their sleeves that might make me think otherwise – let’s see!
