Seven Steps for Making a Fashion Dream Come True

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Seven Steps for Making a Fashion Dream Come True

06/09/2010
Get a full set of guidelines for building a fashion business from the ground floor.

By George J. Nemphos and Nanette C. Heide
Duane Morris LLP


Fashion is built on ideas and dreams. Despite a difficult economic environment, the apparel industry holds promise for entrepreneurs with a good idea.

Venture finance, long recognized as the monetary fuel for the technology industry, is branching out to new businesses, including fashion. At the same time, large and established apparel and brand-name companies are faltering, leaving opportunities for a new generation of entrepreneurs.
With experience helping fashion entrepreneurs start new businesses; we can point to seven steps that will help entrepreneurs make it on Seventh Avenue.

1. Identify a need. Your great idea must also meet a need that has gone unnoticed or has been inadequately addressed. Entrepreneurs who have worked in the apparel industry are typically the ones who recognize a new technology or niche product.

Others are driven by a creative need to design. Either way, the initial idea must be carefully vetted to ensure someone is willing to pay for it.

While entrepreneurs often embark on uncharted territory, there are indicators to help determine the right direction.

Current fashion trends on the runway or in stores are often a guide, while the Internet and other public resources, such as apparel industry trade journals (such as Apparel) and conferences, also provide clues.

Experienced professionals like accountants, lawyers and business consultants, who have worked with entrepreneurs in the garment industry, can also help shape startup ventures. Many new designers and apparent manufacturers hesitate to seek help from professionals because they fear added expense. However, many professionals with apparel expertise are willing to negotiate flexible payment, with the hope of developing a successful, long-term client.

2. Find a community. Successful entrepreneurs do not make it alone. The Silicon Valley technology community is perhaps the best example, but industry clusters exist in many other sectors.

Apparel industry networks come together through business events and trade organizations and extend into social relationships. As personal ties develop, fashion entrepreneurs gain important information and feedback to shape their businesses. While it may seem that designers or other fashion entrepreneurs would be wary of each other as potential competitors, their ideas are usually so wildly different that little or no conflict exists. Entrepreneurs have more to gain than lose by building friendships and trusted networks in the fashion and apparel community. Down the road, an entrepreneur who gains a reputation as a thoughtful and helpful advisor is likely to be invited to participate in new opportunities with other companies in the future.

3. Write a business plan. An apparel product without a business plan is a product, but not a business. Investors demand a fully researched, viable and defensible business plan before backing a startup. Think of the plan as the story of your enterprise. You must be able to draw characterizations of your customers and your competitors. Are you reaching out to teens or career women? Who is already dressing these people?

After defining a market, the business plan should anticipate operational issues, everything from the source of material to the cost of preparing samples to wage and benefit requirements for employees. The plan must have numbers that point toward profitability at a definite time because it will form the basis for the investor funding that will enable your dreams to go from the sketch pad to retail racks. Seek input from the community or business professionals with garment industry knowledge to help develop the plan. An M.B.A. student may be willing to help write a business plan for a modest fee.

Once you have a plan, keep it updated. Change in the fashion industry is inevitable.

4. Determine the capital structure. To attract partners and investors, new designers typically offer equity stakes in their startups. Too often, they give their businesses away before a stitch is sewn. Many fashion entrepreneurs divvy shares on a percentage basis. Later they get trapped by the inability to add more shares without also creating huge amounts of additional equity for current shareholders.

When determining this capital structure, entrepreneurs may also want to consider how the initial owners might exit. Shareholders in fashion businesses typically do not benefit financially until the company is sold. In many other industries companies pay off early investors by selling shares on the stock market through an initial public offering (IPO) but IPOs are rare for apparel startups because so much of the equity is parceled out to investors that there is little left for the public to absorb.

The initial structure should take into account how investors ultimately will be compensated. Also consider different forms of corporate organization. A limited liability corporation may be easier to structure in the beginning, but a traditional corporate structure might be better from a long-term investment perspective. Mistakes in the ownership structure can be remedied, but it would be best to get it right at the outset.

5. Establish management. Entrepreneurs in the fashion and branded-products sectors are creative thinkers. They have brilliant ideas and a driving passion to express those ideas. Generally, though, they do not make good managers. When considering whether to back a fashion entrepreneur, venture financiers look for an experienced management team with a track record of building solid apparel companies. Rarely does one individual have the creative spark to start a company and the managerial strength to lead it beyond the initial stages. Even experienced managers are better at some phases of development than others. While it might be difficult to attract established garment industry executives to a startup, consider reaching out to retired or downsized professionals or people who might be looking to make a career transition. Good managers might be ready to take a chance on companies driven by leaders with the entrepreneurial strengths they lack.

As with the capital structure, remain mindful of how your company might break up, even as you appoint a management team. Clearly defined responsibilities and transition plans can protect a business from a major disruption if a key manager leaves for any reason. Sometimes partners in an apparel business believe they can share equal responsibility for the enterprise. This is a blueprint for trouble. Each should have clear responsibilities, with one manager overseeing all of the others. While it may be difficult for spirited designers to step back from day-to-day operation of the business, they can continue to contribute as much--or more--value to the company as chief creative officer as they would as chief executive officer.

6. Guard intellectual property. Your creativity and the fashion products it generates are your company's most important assets. Apparel entrepreneurs often yield the essence of their business because they do not fully understand trademark, copyright, trade-secret and design-rights protections or know how to protect them. Most fashion companies--except those with a breakthrough technology--do not need patents, but could benefit from other intellectual property safeguards. They must also ensure they are not violating others' intellectual property.

When working with sample makers or other firms on a contract basis, it may be worthwhile to secure confidentiality and work-for-hire agreements to retain ownership of work that contractors might provide. It may also be a good idea to obtain releases from talent used in print and television advertising and on the Internet. Most startup fashion executives can probably handle the two-page copyright applications, but trademark protection is more complicated and often requires a professional search service. For fashion designers, trademark protections can be emotional because, in many cases, their own name is at stake.

Intellectual property is also more complicated today, as products have become increasingly sophisticated through the combination of more than one new process or product. If an entrepreneur comes up with a new way to waterproof silk and another company uses it to make raincoats, which one owns the rights to the combined product? Entrepreneurs in the apparel industry need to ensure that each of the combined elements is protected.

7. Consider licensing. A faster route for entrepreneurs to profit from their idea may be to license their concept to an experienced company that is set up to manufacture and distribute new products. If you license intellectual property, confirm that it is within very precise definitions, so you do not relinquish more rights than you expected. Licensing out some aspects of your intellectual property can be a good way to create a revenue stream to help finance your core product. But be careful of turning over too much opportunity. If you design a fabric and license out its use for raingear, be clear on exactly what you mean by raingear. You might be thinking raincoats, but could it also mean boots? What about $1 rain ponchos? Or raingear for children? Make sure you are not signing away more revenue than you thought with overly broad licensing agreements. As with all intellectual property, financial backers are likely to want to ensure that any licensing agreements do not diminish their holdings in any way.

As apparel industry entrepreneurs approach each of these steps, they should keep their dream in mind. While most start with an idea of becoming a household name with a huge company, attaining that is not easy or assured--and the struggle can take a toll.

Entering the fashion industry requires some soul-searching. Many achieve financial success and professional satisfaction, even if they never become celebrity designers. Whatever your goals, it is important to consider them as you design your own entrepreneurial future.

Thanks to the partners in the corporate, intellectual property and litigation practices at Duane Morris who contributed ideas for this article: Eberhard Röhm, Lee Potter, Greg Gulia, Keli Isaacson, Jay Cohen and Michael Schwamm.

George J. Nemphos is the managing partner of Duane Morris' Baltimore office. He practices in the areas of corporate and securities law and has extensive experience in representing both private and public companies, venture capitalists, angel investors and private equity funds. Mr. Nemphos frequently represents clients in mergers and acquisitions transactions as well as securities law, compliance and general corporate matters. His clients have included emerging businesses, high-tech and telecommunications companies, private equity and venture capital funds, manufacturing companies, and companies in the capital markets, life sciences and homeland security industries.

Nanette C. Heide practices in the area of corporate law. She represents investment banks, venture capital investors, public and private multinational corporations and startup companies in a wide spectrum of corporate finance transactions, including institutional private placements, private equity and venture capital investments, cross-border transactions, debt and equity structuring transactions, mergers and acquisitions, reverse mergers, joint ventures and strategic alliances, exchange offers and recapitalizations.