Navigating the Investor Landscape:
How to raise funding as a textile tech start-up.
Although a relatively new and unfamiliar space to investors, textile innovation is primed to bring real change to the $1.7tn Fashion Industry. However, an immense challenge facing innovators in this space is in finding funding that can help their venture reach scale. Fashion for Good’s mission is to bridge this gap, connecting innovators with key industry players and access to our investor network.
In this article, I want to share our learnings with innovators seeking funding in this space. In particular, I will zoom in on textile ‘deep tech’ innovators, by which we mean technology innovations based on scientific advancements. This is in contrast to ‘softer’ innovation categories such as e-commerce, apps, consumer products, etc., which generally have less trouble fundraising.
The High Demand for Innovation
Increasingly, brands and retailers are committing to innovation, primarily as a result of sustainability targets and pledging towards circularity through iterative and timely science-based targets. To achieve their ambitions, brands are actively seeking innovation that will bring real change to the industry. Financing challenges remain however. To pilot and implement these innovative solutions iteratively, a significant amount of equity capital is required.
Pilot projects are usually performed over a period of multiple years and in partnership with brands, retailers and manufacturers, in the hope that they will eventually result in commercial implementation and an orderbook (revenue). As a result, access to early and mid-stage (pre-revenue) venture capital funding to bridge this period, consistently presents itself as the most pressing issue preventing innovators from progressing; an issue not present in all industries.
What you as an Innovator can do.
If you’re an entrepreneur or considering a venture in the textile deep tech space, there are a number of points to consider that could help you get the funding you need. Quite a few variables may significantly affect a fundraising strategy and the likelihood of raising substantial amounts of funding.
While a plethora of books, blogs and presentations cover everything from building a pitch deck to presenting financials, we instead want to focus on the aspects distinctive to textile tech ventures.
1. The obvious one: have recurring revenue.
The single most important element propelling any venture to the next level is revenue. Once a steady stream of material recurring revenue is coming in from clients (brands and manufacturers), interest from investors, including those that have not previously explored textile tech ventures in detail, will surge.
However, many ventures do not find themselves in this luxury position yet and even require significant capital in order to generate initial revenue. Getting to revenue in this sector is not easy, but not entirely out of reach as outlined in the points that follow.
2. No revenue yet? Show the timeline to it.
If you do not have recurring revenue yet, questions on timelines to commercialisation and implementation complexity are bound to arise, plan ahead and know your path to commercialisation.
As with the first point, this may sound obvious. However, for engineers and scientists, often the founders’ profile of the ventures we envision here, the transition from an R&D focused enterprise to a commercial entity seeking to bring one or a few products to market does not always come naturally. There may still be other things to solve or other application areas to develop, however you may want to focus on just one application and bring that to commercialisation as quickly as possible, before taking on the next scientific challenge
Focus on one product. Identify who will purchase this product and why they will purchase it given the incumbent solutions and sustainability. Have a clear pricing model that ideally generates recurring revenue
3. Complex application? Keep it simple.
If your venture is focused on tier 2 or tier 3 manufacturing processes, such as pre-treatment for dyeing, an investor not intimately familiar with the industry will require time to understand how the innovation fits into the supply chain.
Therefore, it is wise to make these complex and/or technical stories simple. Highlight what the current problem is and what measurable benefits (for your customers, e.g. brands, manufacturers) your solution can achieve. There is no need to go through all chemical processes and technical details immediately. Interested investors will want to know more and in more detail if they choose to proceed.
4. Sustainability may be your goal, it’s generally not an investors goal.
Whether you are talking to traditional VC or impact investors, always lead with the business opportunity. It is our advice to not start your pitch, as many innovators do, with a generic overview of all environmental problems in the Fashion Industry. The size of the industry is interesting to investors, but the size of its environmental problem is not of interest in itself.
If your product or solution is cheaper than the currently available alternatives, your narrative may be straightforward. But should your process or product be more expensive than less-sustainable alternatives (where a large number of innovators find themselves), you need to think carefully about how a more expensive alternative can still make money, capture market share and compete with cheaper but less-sustainable alternatives.
The story brands would use to position the more sustainable alternative and market it to consumers is critical. Articulate product attributes that consumers will perceive as different to fuel the storytelling around a more expensive sustainable alternative. These attributes most encompass something more than environmental footprint.
5. Expand to other industries.
A way to mitigate a number of problems relating to this sector, e.g. the lack of finance available from brands and manufacturers and the long time required for multiple testing iterations, could be to focus on other industries first (i.e. as a market entry) or as an expansion opportunity. Identify and focus on where the highest and most acute demand exists for your solution.
Other industries may also appeal to investors as an expansion opportunity. Indeed, many of the ventures successful at raising serious amounts of funding at a pre-revenue stage, did not highlight solely the Fashion Industry as an addressable market, but rather extended to other textile-related applications with quicker or less design-focused supply chains (automotive, technical textiles, workwear) or adjacent industries such as beauty.
The merits of widely applicable technologies are often destroyed by young ventures lacking concise commercialisation pathways. Communication to your possible investor all the markets you technology can play in, but choose one industry to actually launch.
6. Highlight the capital efficient elements of your business.
Venture capital is based on the principle of high risk, high returns. Business models that can rapidly scale, without needing a tonne of cash, fit that profile better than capital intensive business models, such as producing and selling machinery, which could result in high working capital needs and low returns on invested capital.
Fair or not, there is more venture capital financing available for software, Software-as-a-Service, artificial intelligence and blockchain ventures than there is for hardware, machinery and equipment. Consequently, when a VC fund is not explicitly specialized in capital intensive businesses, you may want to make sure they see the overlap with their strategy. Some examples may include:
- Highlight how your dyeing or finishing machine sale is only the enabler of a recurring, high-margin revenue stream, e.g. from the sale of chemicals or services.
- Highlight how your business creates unique software opportunities because of existing hardware.
- Show how your new materials or recycling business may license out its technology to third parties, so that limited financing is required and a recurring royalty stream is secure.
Which institutional funding pockets could be available?
- There are an increasing number of VC funds that have shown serious interest in textile tech so far. Below this article you can find a database containing some of the most prominent.
- Nearly all the ventures we track at Fashion for Good combine environmental and/or social impact with a financial business model. This creates possibilities for impact investors, an ever-growing investor class in Europe and North America, that often focus on specific investment (e.g. certain sectors) or impact themes (e.g. certain impact metrics: water, carbon emissions). Some of these impact investors are also included in the database below.
- Additionally, being a mission driven entity potentially opens up various routes to non-dilutive funding, including various government grants across geographies, either at country level, at EU level, or state or even regional level in the US.
- Corporate venture capital, although very relevant in other industries such as pharmaceuticals and telecommunications, has historically been limited to a few pioneering players in this industry (notably H&M’s Co:Lab, adidas Ventures, Patagonia’s Tin Shed). Corporate VC tends to be more strategic than financial investors, and therefore you should bring strong strategic alignment and/or operational synergies to the parent brand in order to be considered by these funds.
- Direct corporate investments are rare; however, some upstream operators could consider investing in the raw materials / chemicals space, often across continents (Asian operators investing in innovators in Europe/US).
The Fashion for Good Investor Database
Explore the Fashion for Good investor database here: fashionforgood.com/investor-landscape
Final Notes.
The landscape is new, which may hinder fundraising, but there are opportunities if you know how to position your venture and identify opportunities and interested investors.
Since Fashion for Good was founded in March 2017, we have been helping innovators access our investor network, facilitating over 850 business and mentor sessions; to find funding, catalysing €75m+ for our 80+ innovators; and introductions to our 13 corporate partners with whom they have the opportunity to test their concepts in pilot projects, where 40 have been initiated across our programmes.
Connect with Fashion for Good to find out more or have a look at our Accelerator and Scaling Programmes to explore how Fashion for Good could help boost your venture.
