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Financing a Start-Up: Fledgling Designers Court Kin, Kindness

With a keen fashion sense and some business savvy, or a numbers-wise partner, ambitious young designers are attracting some financial backing.

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Allan Ellinger MMG

Allan Ellinger, MMG

Photo By WWD Staff

WWD Photo

WWD Image

Photo By WWD Staff

Mark Montano at his runway show
NEW YORK — Talent-rich, dollar-poor designers are struggling not only to stand out artistically, but to survive financially.

However, with a keen sense of fashion and some business savvy — or at least a numbers-wise partner — ambitious young designers are attracting at least some financial backing, even in the economic doldrums following the go-go Nineties.

For many budding talents, their first financing deal requires not a trip to Wall Street, but a sit-down at the kitchen table.

“You need people to have an emotional reason to invest in a young design talent, and usually it’s friends and family,” said Allan Ellinger, senior managing director of consulting firm MMG.

Even rising star Zac Posen, whose business is a family affair, recently said he’s fueled by “caffeine and cookies,” and “the love and support of good friends and family.”

There’s a pitfall here for Mom and Dad, though: Since young talent often doesn’t know how to take capital and deploy it sensibly, they end up spending a lot of money with little to show for it, said Ellinger. To avoid this, designers need to find their inner business sense. “All young designers have a vision, but there is a balance between art and commercialism, and good designers know how to balance it.”

Jack Mascharka, whose inaugural sportswear collection will make its debut next spring, is financing the endeavor with the help of his father. “The last thing the world needs is another designer because there is not a huge return on one’s investment,” said Mascharka, who picked up experience working for numerous other start-up designers as well as a few established names such as Betsey Johnson. “I knew the only way to have that investment in place is to have your friends and family behind you because you need an investor who is passionate about it.”

An investor offering monetary support without an emotional connection is more apt to leave a younger designer before his or her big break, which could disrupt a start-up’s momentum, slow purchasing, disrupt critical deliveries and delay that elusive character, stardom.

Designer Alice Roi said newcomers need to be inventive. “Definitely for shows, there are a lot of opportunities out there to get sponsorship,” she said, noting that she’s formed relationships with companies hailing from worlds as disparate as hair, makeup and champagne. “There are a lot of people out there who want to be viewed by the more fashionable set.”
It’s harder, though, to get money for a fashion business’ “inner growth” during its early stages, Roi said. “People often wind up regretting deals that they’ve made in a sort of rash manner with big backers,” she said. “It’s better to pine away and make sure your retailers really trust you.”

In addition to building relationships with retailers through store visits and prompt deliveries, Roi said young designers have to know when to turn away from that absolutely perfect fabric that just happens to cost $200 a yard.

“Designing more than two collections a year is sometimes helpful too, because you’re turning goods all the time,” she said. “For the most part, the drive alone is enough, but it’s a business and it’s helpful for someone to at least catapult you to a place where you can make enough money and then pay them back.”

Gilbert Harrison, chairman of investment bank Financo Inc., said financing sometimes comes from “angels” who want a shot at the glamour and publicity that comes from backing someone who could become fashionably famous. Venture capitalists will also consider, though very cautiously, upcoming designers and some strategic apparel and retail companies that appear to have the potential to grow into relatively big businesses.

Harrison said it’s becoming difficult to finance up-and-coming designers and he, as a self-described entrepreneur, empathizes with their predicament. “You have to finance and grow new ideas and companies.”

There’s been a move from European sponsorship of designers and brands to an American institutionalization of funding, said Jeffrey Kuhr, managing director at Sawaya Segalas & Co., a consumer products investment banking firm.

“Historically, one of the biggest sources of funding has been from European companies such as LVMH [Moët Hennessy Louis Vuitton],” he said. “But now, these firms are divesting smaller brands, and what is taking their place are American companies that are getting more comfortable with young designers.”

He pointed to Nike Inc.’s purchase of Hurley, Nautica Enterprises Inc.’s associations with Earl Jean and John Varvatos and Liz Claiborne Inc.’s acquisitions of Sigrid Olsen, Lucky Brand Dungarees and Juicy Couture.
However, all that could be a step ahead for many designers just starting out.

Designer Mark Montano said fashion newcomers are increasingly taking their financing into their own hands, as he has. “The trend lately has been that young designers are realizing that opening a small boutique is probably the best way to get capital to finance their wholesale collection and also have an outlet to get rid of bounced goods and whatever return merchandise they have,” he said. A storefront also works in an advertising capacity.

“Most young designers don’t have a lot of money,” said Montano. “They don’t have two nickels to rub together. It’s like being an actor. You do it because you love it — a lot. It’s really hard sometimes to stay in business.”

Small specialty stores can also be a financing venue when the product fits the needs of the retailer. Karen Daskas and her sister, Cheryl, co-own Tender, a small upscale boutique in a northwestern suburb of Detroit. For them, doing their homework means searching for young designers, from the U.S. and Europe, who bring uniqueness to their store.

“It is the specialty stores in the U.S. that have built up the name behind a new collection,” said Karen Daskas. “We’re the ones doing the footwork and giving new people a chance. If a collection is in the department store, I usually won’t touch it because my customers want some kind of exclusivity.”

As for finding new designers, she said, “I’ve gone all over from fifth-floor walkups to walking down alleys just to look at new collections. It gives us a chance to give a new designer a start.”

Since start-up designers often are limited in both production scale and finances, many ask retailers for a deposit of between 30 and 50 percent of the purchase order up front. Tender introduces four new designers each season with up-front financing for each new talent anywhere from $3,000 to $15,000. “It can add up, and is risky for one small store, but it’s good for our shop to have something different and it helps the younger firms,” she said.
Scott Reiss, whose wife and partner designs the Lauretta Reiss Collection of upscale footwear, said they financed their start-up themselves beginning in January 2002 and have been busy sourcing in Italy. The collection is now sold at 75 high-end shoe stores and specialty women’s shops. In fall 2003, the collection will be in select Nordstrom stores.

Initial success produces its own challenges as a firm develops. Scott Reiss said the company is at that “critical point where orders are more than double those of the first season. We’re putting together packages and shopping at various factors in New York for additional financing. We have adequate cash flow to fund the sales and marketing side of the business, but are looking to factors to help with the letters of credit that are required for our factories.”

Stanley Officina, president of Sterling Factors Corp., noted: “The factoring industry is probably the best equipped to understand what [young designers] are going to need to get started in the business.”

Factoring can be an effective way to maintain steady cash flow running through a small operation, but all this presupposes that the designer already has the business up and running. Since factoring is primarily the business of purchasing accounts receivable, it is only an option for designers who have already secured financing to design, produce and sell a line of goods. Factoring can be a lifesaver once designers have shipped their wares to retailers and are awaiting payment for periods from 30 to 90 days or more.

The factor purchases from the designers the money owed to them for orders shipped and gives them a portion of their payment due up front. Later, the factor collects the remainder of the balance and, minus a percentage for its own coffers, gives the designers the rest of their due.

Due to client bases that are often large and varied, factors can also offer budding businesses insight into the industry and how their financial operations stack up to benchmark levels.

They can also offer some down-home advice. As Officina noted, young designers “should probably apprentice for a couple of years to see how the industry works. Not everybody can just jump out of the gate and be Liz Claiborne. It’s a very complicated business with many different aspects to learn that you just don’t pick up in design school or business school.”
As the dot-coms have shown, though, long-term success goes beyond the ability to simply attract financing.

At J.P. Morgan Chase & Co., senior vice president Philip Bleser usually deals with fashion companies that have already shown they can grow, but he recognizes that they are shaped in their infancy. “The model that’s successful does not revolve around the financing as much as the partnership,” he said, noting most successful design ventures involve both a strong fashion point of view as well as a sound business mind.

“You want your financial partners to understand the industry and really be advisers to the business,” he added. “A lot of people can put the numbers together and a lot of people can lend you money, but can they give you advice?”