The Business of Fashion for Investors: How Lucrative it is for the Investors to be in?
The panel at IFF 2018 discussed several points on how lucrative it is for the investors to be in the business of fashion.
The panel at IFF 2018 discussed several points on how lucrative it is for the investors to be in the business of fashion. They spoke on how investors look at investing in the apparel space and what the companies seek from the investors. How do they make the matrix right so that the investors are more positive about approaching those industries? How do they grow their businesses together? What is the collaboration between the investor and the companies that they have invested in?
Excerpts from the panel discussion:
Moderator Baqar Iftikhar Naqvi:
We wish to know ICICI’s view on investments in the apparel space. What view do the investors have for the apparel sector and are they really looking forward to invest more and more in the physical space?
ICICI Ventures has always liked and interacted with the apparel space. As an investor, we have always been very positive about apparel and fashion segment. We have recently invested in Go Colors. From a macro perspective, there are a lot of strong underlying trend spaces, be it the overall growth story in terms of income levels going up or per capita going up, or brand differentiation coming up on its own. We also believe that from an Indian point of view there are very few brands of size and scale and that is what we need to change in the next few years. As an investor we are more than happy to play our part in providing capital to the right entrepreneur who is playing that change. From an investor perspective what we want to see is businesses with a long-term sustainable story and long-term franchise value. We are an old world private equity house. We do not believe that business can double or triple overnight. We are rather happy about the steady growth trajectories. We are happy to see businesses building from a long-term perspective and that is what makes it exciting for us.
Is the business more top line driven or a bottom line driven?
I think it is either. It has to be both. It is pure top line. We like to see businesses, which are sustainable and for sustainability growth is a must. Status quo is not an option in the country as we stand today. But growth without bottom line or healthy growth is not something that we are too excited about.
Manyavar raised capital most recently. What was the matrix that Kedara was looking at when they were investing in Manyavar? What was the hypothesis, the key elements of investments from Kedara into Manyavar?
Sneha Jain Paul:
If the business has a vision of where it intends to go and where do the stake holders want to take the business to, it is the most important thing. What is more important is what are the things that are already set in place. Focus on systems and processes is also very important so that you know how your merchandise is moving, how well do you know your customers – their tastes and preferences. If you get these basics right, customers’ focus and your customers centricity right you are in a place where investors can look at you to come on board and work with you. I think with Kedara, what is very important for them is that how is their work unique, how do they look at investments in a business – what are the things that they should change in a business. They have a listing system of what are the unique USP’s of the brand and what are the things that should not change, so that it goes from point A to point D. With Manyavar it was definitely the value system that we brought with us. We were very rooted to our Indian values. Bhartiyata is the ethos of our brand, which they did not want to change.
Post the investment, how have the two of you worked together with Kedara on one side and Manyavar on the other?
Sneha Jain Paul:
It has been really exciting. Ever since last one year when they have come on board, there has been a lot of learning for us. We were and we still are a small company based out of Kolkata with a `1,000 crores turnover. They come and they tell us how to do things better and it is an exciting experience for us because there are so many new things that can be done. For instance, we had an in-house analytics team who did a lot of analytics but all in the merchandise field. They came and suggested that why don’t we put customer analytics into play. We worked hard on it and realized that so much was happening in that space in the country and it was so exciting. There are various other examples of this sort where they have just been showing us new things and great things that are happening in the world, which we can implement and that’s what is exciting for us.
One of the things that we tell the clients is that investors just
don’t typically bring funds; they bring in a whole new eco-system, lot of best practices, which are essential for the overall growth of the company. What are the things that investors bring in beyond money?
Our story is more of start-up from a scratch so the partnership at that level with the investors is from a different perspective. It is essentially growth capital to just help let the business grow. This whole concept of investors and apparel business coming together is basically to create value and help businesses to achieve their potential. And in India branded apparel business is at a very high growth rate and there is a lot of potential for many brands and many spaces to create something very big here. I think the investors primarily aim to create a value within a certain specified period of time, which is permitted by the mandate of their funds, etc.
So we need to understand at what stage is the business and what is the specific requirement of the business for that stage. To do that, we could classify the journey of apparel branded business into three stages. The first stage is a threshold below `100 crores, where the business actually establishes itself, by establishing the product line, consumer segment and the primary selling channel, which are essential to help build up the whole brand and apparel business. The second stage is a `200 crores stage, the third stage is `300 to `1,000 crores and then the `1,000 crores stage. Manyavar has already reached that stage and they are looking at it from a different perspective.
Initially when a business starts, you are in a 0-100 stage and you raise capital. The main thing that the investor brings in is a structure to the business to help you remain organized to create a brand. They bring in a SKU based management, etc., make sure you have your MIS system in place, strategise for you the right channels to reach out to your end consumers. And see how you are defining your role. So those are very formative years and it is only in the second stage when the challenges become different, the investors bring in something different. Once you have established yourself as a semi, reasonably known apparel brand then comes growth and how do you manage growth. I think there are different stages that we need to understand.
From Spykar’s perspective it is the second investor we are working with and I think it all goes back to very basic tenets. The primary diligence that one needs to do is on people vs. anything else. I feel if you don’t have the right set of people aligning then however good processes or however great is the market, they are not going to work for you. Whether you are on the investor side or on the brand’s side, I think the primary alignment has to be on whether we are fine with each other or not. For an investor it is very important to know with whom he is working with because the kind of business that we are in is not binary for sure. A lot of things are on gut, whatever level of analytics you may employ. There are people who are trying to do forecasting. But I am a very strong believer in using analytics to get into forecasting or you will be just creating clothes and this whole essence of fashion, creativity and uniqueness will not survive. It will not give any brand an edge in the market. So, I genuinely feel that a set of people finally is very critical in this kind of space. Both the parties need to understand what the goal is. In fact it is more important for the brand owner to understand the goal because he is in the business for good. Whereas the investor is into it for a definite period, only till he wants to be in the business. So if you do not align your goals and the speed, it can create issues between the two. The investor may want to move at a speed, which may allow him to move out after five years. For instance in the last 3 to 4 years nothing has been constant – it has been really disruptive. So from that perspective the period at which both are going to be aligned needs to be very certain.
Also, any brand owner needs to look at people who are going to be there for long term in advising. I think those days are gone when a foray of people were required to make tons and tons of evaluations. So it is hard work out there and if you do it well, there is money to be made. But the money to be made is not in that quantum which people used to look at a few years ago. Tempering of expectations, tempering of how do you want to move ahead, all these things are very critical for either parties because as a brand you need to take private equity money only when you are doing well. It’s a relationship of equals.
I feel it is the timing, which matters a lot. Also the overall goals of both the parties matter and even the connect that
you have with the people is important. For me people are paramount, rest everything else can be set up. Citing the example of Spykar, we still have the same set of people with two investors. Today we are among the top three in profitability. The previous investor could not manage anything but nothing has changed at our end as far as people and operations are concerned. It is probably the alignment of goals and ambitions of the investors, which were not right.
Please throw some light on the alignment between the investor and the management of the company, because that is very critical to create wealth for both the stakeholders.
Fundamentally, some disalignment will always be there due to some extent because as an entrepreneur you are here for 20 to 30 years or in the Indian context for a few generations but as an investor you are coming in for only a 4 to 5 years period. It is very important to be clear what is doable and what is not. As an investor it is very important for me to know with whom am I partnering. It is not a business but it is the person I am partnering with and will I as an investor be able to work with this person for the next 4-5-6 years or not.
When you are trying to grow 15 to 20 percent a year there will be certain things that will go as per your plan and some not as per plans. Are you both able to understand and acknowledge that, have you both built in that margin of error, are you able to believe and trust each other that both of you are doing the right things for the business? Full respect towards each other, working styles that match well and compliment each other as well as trust in each other is very important. As an investor I won’t tell you what kind of products to put in the store, where to source your products from, what the designs palette should look like, but at the same time in issues around financing, governance, strategy, etc. I possibly can add more value.
It is important for both management and the investor to know what their roles genuinely are. As an investor I am not interested in being a CEO of the company. When you go down the path of raising capital it is always better to do it when the business is looking good and things are looking up because then you are in a positive frame of reference and you do a deal of equals. But at the same time you have to also recognise that the investor is also there for making money out of this whole process and invariably it is not the investor’s own money. He too has raised capital from a variety of institutions across the world or from within India. He also has a fiduciary responsibility to set up the whole business plan. When you set up the entire investment conversation as management, you also need to have the same perspective what is real and what is unreal.
If I will put a higher valuation today on the basis of an unreal business plan that can lead to a breakdown. The moment you realise that the things are not going as per the plan, despite things going 15 percent a year, if I underwrote a 25 percent growth story in valuation and if it is a 20 percent growth story there will be a miss match.
I think the onus is on both the sides. As an investor I take a management business and believe this is fine and underwrite it then that’s my folly but even as management if you agree that you push a business plan for the sake of today’s valuation there is a challenge.
As management we need to take the perspective of value creation from a longer term and therefore build a business plan in a manner, which adds to the business from a 10 to 15 years perspective.
Most important is the chemistry between the people on both the sides. They should have the right chemistry, the right understanding and the right manner of working with each other and trust and respect for each other.
If I am a minority investor in a company and I believe that my majority partner is not doing things in the right interest of the company, there will always be a dispute. If I believe that he is taking decisions in the right interest of the company, then though some decisions may go wrong but as long as both have understanding and comfort, it works fine. The moment as an investor or as a management I start believing that my 80 percent has a different value, that’s when the things break down.
I think it should be looked at some kind of a marriage and you need to live together and be broadly in sync with how you want to lead your life. Otherwise it does not work. If you want to go on different tangents, then that can be laid out in the beginning while drawing up the business plan, at the pre-investment stage. It is not an overnight decision that an investor or a company takes. It has to be a mutual decision.
If someone shows interest to invest in a company, it is equally important for the company to access whether there could be a mutual fruitful partnership or not. Though money is primary, but you also need to work together and have common goals, at least during the tenure of the fund and later it should also align to your long-term vision. Maybe at that point of time, the founders or the company owners should be flexible in hearing out and listening to ideas or strategies. Most of the time investors with their kind of experience and interactions with other people in the industry can give you a lot of perspectives. It is about taking joint decisions as far as key strategy decisions are concerned. At that extent you need to be very open and flexible and make yourself comfortable.
One of the investors we were interacting with for the first round said if you feel comfortable picking the phone at 10 o’clock at night and telling me something which has gone wrong or right, we can be together. One should have that kind of relationship with the investors where you do not treat them as outsiders, but as part of your system. They are not there for your day-to-day management or operations. Nor are they telling you to buy from X or Z. But then as a business eventually you are both in it to create a certain value for the shareholder and to some extent there has to be a certain comfort with each other.
A lot of funds that we meet also specify that they want to invest only in a certain size of the industry. Not very many companies are beyond `500 crores and very are few beyond a `1,000 crores. Is that something very critical? How do you look at it?
At ICICI Venture, we are very happy to work with companies which have a business of `500 crores. There are different investors and different stages of a business evolution. When you are a startup and are growing from a `100, `300 to `500 crores, you look for a different kind of investor and support and beyond that it becomes a very different ball game. I think the bigger challenge is the fact that a lot of capital which came into the market, at least in the last few years is the capital, which wants to see very rapid returns. Thanks to the e-commerce story, people have got used to the 100 percent y-o-y growth, but unfortunately that does not happen in the real world, and certainly not in a sustainable manner. As investors and an investment house we look at businesses, which are sustainable in the long run. We are not investors who like to bag businesses, which need 5 rounds of capital raise to survive. We are happy to write a larger cheque today and put more money in the business but only if you want to build a business plan in a manner that sustains.
At the end of the day in India, most of us are back promoters and management teams. Most investments in this space and otherwise are still minority deals. You want the promoter or the management teams to have enough skins in the game for a longer term period for him/her to be excited about doing that business. You do not want him/her to be on the road every year trying to raise capital. You want them to focus on building the business on a sustainable manner. Then whether you are a `100, `300 or `500 crores business, there are different investors who look at different ticket sizes. At ICICI Ventures we look at ticket sizes of 20 million dollar and more. If someone is smaller in size and scale they look for investors who do the `50 to `60 crore kind of deal and for businesses which are much larger, there are obviously much larger investors as well. You should be clear as a company why you should be raising money and why are you getting an investor. If it is only for the money then you should probably take a bank debt from someone who is sitting 10,000 miles away and comes twice a year and will not ask you too many questions but hopefully as an investor we are able to bring some value to the business by being collaborative and by being partners.
Take a view and ask who is the right investor for you both as an institution and as an individual and then with that institution and individual you negotiate hard and get the best of the terms you can. Challenge should happen in the current framework how deals get run. You should invite a bunch of bids and see whom you are most comfortable with, who you can pick up a phone and call in the night to give the bad news. Accordingly deal and negotiate as hard as you can.
What is your suggestion to the delegates here and to the larger industries who are trying to raise funds. What should be the top two things one should look at and what should they expect?
Set out a very realistic business plan and set the level of expectations very clearly on the table. We normally tend to create unreasonable expectations from the businesses when they start boomeranging back on you. A very honest assessment of the business plan, backed by real research and understanding at your end is necessary. Eventually the investors buy into that business plan and make their own assessment. Be very sure and honest of what you are setting out to do.
Sneha Jain Paul:
Businesses need to focus on what they want to continue doing themselves and what the investors advise on. If they can create that divide I think they can best collaborate. When they know their key strengths and they marry into an investment firm, which comes with another set of key strengths, they can just complement each other. If that analysis is made, it can be the best collaboration.
I feel that the promoters and the founders know the business much better than the investors and that is the belief one should always have. If that belief is shaken then everybody’s money will go down the drain. So if you want to get any money investor in the company, one has to have a sense of who is partnering with you. Who is going to the board with you? Whether he has enough experience on ground because the business on excel and on ground is very different. Also it is very important to have enough money in the business or it will crumble. So only a brilliant idea, a brilliant opportunity and not enough money at the right time, are the issues that probably will take the whole fun out of the business.
Panel Discussion Summary
The whole concept of investors and apparel business coming together creates value to the business. Both the parties need to understand what the goal is. An investor needs to know with whom he is partnering with. It is not the business but the person he partners with and needs to see that will he be able to work with that person for the next 4 to 6 years or not. Both should have the right chemistry, the right understanding and the right manner of working with each other and trust and respect for each other. Investors look at businesses, which are sustainable in the long run and try to bring in some value to the business by being collaborative.
“If you don’t have the right set of people aligning then however good processes or however great is the market, they are not going to work
for you. Whether you are on the investor side or on the brand’s side, I think the primary alignment has to be on whether we are fine with each
other or not.”
-Sanjay Vakharia, Director & COO, Spykar
“Investors and an investment houses look at businesses, which are sustainable in the long run. No
investor like to bags businesses, which need 5 rounds of capital raise
-Nikhil Mohta, Director - PE, ICICI Ventures
-Baqar Iftikhar Naqvi, Business Director, Wazir Advisors
“An investor brings in a structure to the business to help you remain organized to create a brand. They bring in SKU based management, to ensure that your MIS system in place, strategise for you the right channels to reach out to your end consumers.”-Manu Indrayan, Co-Founder & CEO, 612 League
“When businesses know their key strengths and they marry into an investment firm, which comes with another set of key strengths, they can just complement each other.”-Sneha Jain Paul, General Manager - HR, Manyavar