The luxury goods sector is booming again. In 2021, the luxury fashion sector generated revenue of €6.15bn in the UK alone, surpassing the 2019 pre pandemic market, based on figures from Statista.

Investors remain very keen to tap into the sector’s resilience. Personal Luxury Goods remain the most attractive sector for investors, with Apparel & Accessories, and Cosmetics & Fragrances being the most prominent ones, according to Deloitte’s 2021 survey. Entrepreneurs starting up, or growing, their luxury brands continue to benefit from tremendous opportunities. Although, for every success story there are plenty of brands that never fully achieve their potential.  

The lingo

The investors that typically target luxury brands are known as venture capital (VC) or private equity (PE) funds. Venture capital is a type of financing provided to start-up companies that are considered to have long-term growth potential. Private equity is a source of investment typically provided by larger institutional investors to more established companies (think Jimmy Choo, which was backed by a PE investor in the early 2000s and which subsequently successfully achieved its initial public offering).    

The right financiers

If you are considering partnering with a VC fund to grow your luxury brand, it is crucial to align with a fund that is the right fit for your business (pardon the pun). Now is the time to avoid making a snap decision and instead watch out for two things: experience and ethos.

Experience - with an array of funds out there, it is often better to find a fund with an already well-established portfolio of luxury brands. The fund will be investing in the success of your business and will offer advice on expansion and growth, and act as a sounding board. You will want an investor with an eye for the future trends in your luxury sub-sector, who can bring genuine insight and value to your growth. Being an experimental investment in a fund's portfolio of companies will be unlikely to lead to a successful business relationship.

Ethos - 'Conscious consumerism' is on the rise, with many consumers aligning their purchases with their morals, and you should do the same when choosing which VCs to pitch to. Whether your focus is sustainability or supporting a different cause, it is important to choose a fund that shares your ideas and goals, as the investor will be an extension of your brand identity and team. In fact, many funds are using the same mindset when searching for new investments. For example, the ESG focused fund, 'the Craftory' has their 'three and a half criteria' which potential investors will need to meet to be considered.

The right team

As your luxury brand grows, you will deal with more sophisticated investors who will be represented by counsel. You will likewise need a legal team to advise you with the legal drafting, ensuring that your rights and control of the company remain protected. Financials are key to showcase the growth of your business, especially in the first few years of a start-up's journey, so you need to have a tight grip on where the cash is going and the financials and records to back that up. You may also want to consider appointing an additional director or two to add additional skills, to provide further reassurance to investors and to ensure you have sufficient time to concentrate on your growing brand.

The right idea

As with any industry, technology is at the forefront of the retail and luxury sector. Investors are looking for visionary entrepreneurs who buy into that, to create an irresistible desire for their brand.

For example, Cudoni, one of the pioneers of UK’s second-hand luxury market which uses algorithms to price luxury goods, was first backed by dmg ventures during their seed round in 2019.  The fund continued to lead the company through their Series A round of £4.6 million. 

Outside of technology, other 'disruptor ideas' have led luxury brands to experience substantial growth. For example, cosmetics start-up, Beauty Pie, founded in 2018, created a buyer's club for its members.  This allowed members to buy directly with significant discounts in exchange for a small monthly fee. This disruptor concept secured the company a Series B $100 million fund in September 2021, backed by funds including Index Ventures.

ESG is key

Whatever your disruptor idea, environmental, social and governance (ESG) is a concept that will become paramount in the growth of luxury brands going forward.

The Redrice Fund, which launched a £60m fund to invest specifically in retail and technology luxury goods, have stated that they mark their investments against an 'ESG scorecard', and Walpole, the official sector body for UK luxury, has published its British Luxury Sustainability Manifesto.

At the same time, the luxury brands sector is being opened up to the younger generations who have a key concern for the ESG initiative. With Gen Y and Gen Z predicted to make up 70% of the luxury brands clientele by 2025, any start-up luxury brand must ensure that ESG is part of their focus.

Conclusion

A luxury brand is one that is built to stand the test of time, which takes years to achieve. For start-ups, finding a committed equity partner will help jumpstart the process. However, ultimately the financial position will follow the brand strength rather than the other way around. Founders should be patient and remain true to their brand, and their values, when securing finance. 

This article was co-authored by Bird & Bird Partner Nick O’Donnell (nick.odonnell@twobirds.com), Associate Remy Browning (remy.browning@twobirds.com) and Solicitor Training Anna Mikhalkovich (Anna.Mikhalkovich@twobirds.com).