- October 1, 2021
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While many industries look to venture capitalists for growth funding, the fashion industry is one that requires a bit more caution and patience from investors.
Venture capitalists can be described as private equity investors that provide capital to promising entities that show high growth potential. A venture capitalist that sees merit in a particular company may provide financial assistance in exchange for an equity stake, as they believe that the company will be profitable in years to come, therefore, the agreement is generally viewed as a long-term investment in most cases.
Although venture capitalists may invest in start-ups, it is not a common occurrence as they do not have a track record to support why they are deserving of the funds. However, that is not to say that it does not happen; but to limit the risk, they generally look to provide support to entities that are ready to scale up or commercialize their operations, which is often based on performances and results from past years.
This is essentially what entities use to corroborate their desire to grow and their projected growth and earnings to venture capitalists, in the hopes of swaying their decision to invest in their operations.
Factors such as strong leadership, an established market, proven demand for products or services, growth potential, and competitive advantage are some of the key things that venture capitalists may be on the lookout for when making their decision.
As with an investment endeavor, venture capitalists also risk losing their money should the company fail or not show any significant growth in subsequent financial years, which would mean that they would earn little to no return on their investment. In a worst-case scenario, they could even lose all of their money.
With the potential to lose all their money, it is no wonder that venture capitalists are very particular about the industries and sectors in which they operate. When one thinks of the fashion industry, for example, which is characterized by trends, global relations, and short product life cycles, it is no wonder that extra caution is applied by potential investors.
Some view fashion businesses as a poor investment prospect, but this is not to say that it is true for all fashion brands. It is a known fact that it takes years to establish a credible fashion brand that stands out from the crowd, especially in such a competitive space, and while venture capitalists seek substantial returns, strategic or angel investors do not. They offer more patience and a tailored approach and understanding of each entity they invest in.
This is one of the reasons why the latter is preferred over the former in the fashion industry. Moreover, because fashion brands tend to source some of their materials abroad, the forex impact on the fashion industry is a key aspect of success and the ability to deliver what is required. Given the global conditions of 2020, venture capitalists are believed to be even more cautious of fashion brands as many were either forced to close shop or seek rescue funding to stay afloat.
The fashion industry has always been a rather unpredictable one as brands can’t always confirm customers’ future preferences, which makes their growth prospects somewhat uncertain and risky for venture capitalists who expect to see some sort of return on their investment sooner rather than later.
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