Top 3 Reasons Why VC’s Don’t Invest in Designers
As operations manager at the venture capital fund, Innovation Ventures, a subsidiary of Innovation Capital Advisors the parent company of FashInvest. I’ve worked in an office that has been inundated with calls and emails from fashion designers across the world pitching to us with hopes that we can invest in their brands. We ask them what their competitive advantage is and many of them say “our brand.”
Our immediately reply is, “What is that?”
A brand typically has no value at its early stages. The reason for this is that a brand is a simply a perceived economic value by a particular consumer base and most startups don’t have a large enough consumer base to justify that economic value. Plus, building a brand from the ground up is usually very expensive.
Here’s a list of reasons why venture capitalists don’t invest in designers, because I want to help designers understand the business model of a venture firm and not take it personally when an investor says no.
No Intellectual Property
Startups are obviously a risky endeavor and an investor’s primary role is to reduce risk as much as possible. One way to help reduce risk is investing in companies that have strong IP, like patents, for example. This gives the investor more confidence in knowing that you have something of value and it can’t be duplicated or bought, which increases the barrier of entry and decreases the amount of competition. Think of Keurig Coffee and their patented filter. Fashion is considered a “Low-IP” industry along with furniture, perfume and food among other sectors not based on a technology concept. Tech companies usually receive the most attention from VC’s because of their high potential for a speedy return on investment.
Right Brain Thinkers
Kanye West recently visited Silicon Valley, CA to pitch his startup DONDA to investors, but was unsuccessful mainly because he’s a right brain thinker. ValleyWag reporter Nitasha Tiko gives a more specific reason.
“If you see his behavior, it’s so erratic, he’s not focused and kind of all over the place,” she says of West’s pitch.
That doesn’t make a VC feel comfortable with investing in him. Right brain thinkers are typically very creative individuals, but can be slightly disorganized, emotional and struggle articulating their vision in one minute- the typical amount of time it takes an investor to get intrigued by your idea. As part of the team at Innovation, I’ve had to go out and find deals and in my experience within three to four minutes talking to an entrepreneur, a typical investor knows whether they want to do their due diligence and invest in your concept or kick you to the curb.
On the other side, left brain thinkers are more focused, well organized and are analytical. Most people are a blend between the two and others may lean closer to one side than the other. This is not to say one is better than the other, but within the given context of running a business, it’s a little easier to work with a left brainer, but why?
As an investor we invest in a person with hopes to yield a handsome return within a given time period. It’s not comforting if you have a person that doesn’t follow through on their goals, is disorganized, emotionally unstable or the worst- very unpredictable. Again, as an investor we want to reduce risk and Kanye West is an example of a high risk right brain thinker that an investor probably feels they can’t trust, because of his public behavior.
Lack of Venture Knowledge
As a designer you must understand the business model of a VC firm. We make money by exiting or in layman’s terms, selling the companies we’ve invested in within 3–5 years of our initial investment.
We want to see entrepreneurs build their brands first, and then ask for investment versus wanting an investment to build their brand-of course there are companies that raised money to build their brand, but that’s not the norm. As I said earlier, building a brand is expensive. Capital efficient deals with the potential to yield high returns are the best deals.
Also, evidence of demand traction- sales, users, web traffic and the like, are vital, because a good idea or a good product is not good enough, you need a market. When you’re pitching to VCs a vision can be easily lost with a poor presentation. That’s why an effective pitch deck is important, since that’s most likely the first thing an investor sees and uses to make an impression about your company.
When talking about the amount you are raising, understand each firm has a minimum and a maximum amount that they invest in, so only engage firms that match you profile. You’ll waste your time and ours by barking up the wrong tree. Lastly, surround yourself with a team that can execute and not with paid contractors- you need people that are committed to your vision of the company and not to the paycheck.
There are many other reasons that I didn’t mention in this article, but the moral of the story is as investors, we like products that solve huge problems- the bigger the better. That way the company can scale quickly and hopefully be sold with a high return in a few years.
What are your thoughts? Tell us your experience with investors below or share your thoughts about the points mentioned here. Hopefully your experience will help another fellow entrepreneur.
I originally published this on FashInvest.com