Fundraising crunch could hit fashion start-ups

The fashion startup ecosystem is experiencing a significant downturn as founders grapple with an increasingly challenging fundraising environment. Recent data from Carta, a leading equity management platform, reveals a troubling trend of company closures that has been steadily rising over the past two years, with fashion-focused startups particularly affected.

In the first quarter of 2024, a record 254 startups registered on Carta ceased operations, marking the highest quarterly total this decade. This represents a stark 58 percent increase from the same period in 2023, which itself saw a 124 percent year-over-year rise from 2022. The fashion industry, known for its high-risk, high-reward nature, has not been spared from this trend.

High risk, high reward

Notable casualties in the fashion space include Cudoni, a London-based startup that raised 9 million dollars in capital, including from eBay, but shuttered in 2023.

The reasons behind this fundraising crunch are multifaceted. Investors have become more cautious in the face of economic uncertainties, with many preferring to focus on companies with clear paths to profitability rather than growth-at-all-costs models. Additionally, the fashion industry's inherent challenges – including inventory management, rapidly changing consumer preferences, and sustainability concerns – have made it a tougher sell to venture capitalists.

A rise in companies posting bankruptcies is due to the fact that “an abnormally high number of companies raised an abnormally large amount of money during 2021-2022”, said analysts at Morgan Stanley in a recent note to clients, reported the Financial Times.

However, it's not all doom and gloom. Some fashion startups are adapting to the new reality by pivoting their business models or focusing on niche markets. For instance, AI-powered styling service Stitch Fix has managed to weather the storm by doubling down on its data-driven approach and expanding its offerings to include more personalized services.

As the fashion industry continues to evolve in the face of technological disruption and changing consumer behaviours, startups that can demonstrate clear value propositions and sustainable business models will be best positioned to attract funding and thrive in this challenging environment.