As we’ve discussed in previous posts, starting a fashion company is an expensive endeavour. Assuming that the creative ideas are already there, actually creating a collection can make entrepreneurs bleed money for a very long time.
If to some extent, creating the first few samples can be accomplished via bootstrapping, but there’s soon going to be a moment where your financial needs have to be met with capital.
This is a deciding moment for any designer, who needs to be able to show that he or she is able to address the business side of the company, understanding how much money is necessary, and where it should be spent.
The task is a challenging one, as it would seem that putting your project on paper is something many people have never done before, and they need to get it 100% right at first attempt. This does not have to be the case, and in this lesson we’re going to discuss some advice that can help you address this more effectively.
These are the topics we’re going to discuss.
Whenever you decide to turn your business conversations into actual investment opportunities you need to answer a lot of questions. You would do the same: if a friend asks you for money, you want to know what he is going to do with it.
In business, this is even more complicated, as so many variables interplay in the success of your venture. This is why you need a business model and a business plan. Think of them as a tool designed to simplify the way you can talk about your business, by describing it in a language we can all understand.
Your first task is to start visualising your business and identifying 9 key aspects of its internal business logic. We discuss how to design your own business model in this post.
To fill in the boxes of this model, you don’t have to know much about business. To some extent, it can be argued that the less you know, the better. The whole idea of this tool is that entrepreneurs should be wary of their instincts and experiment as much as possible until they find real-life evidence of what works in the real world.
One of the most important aspects of this model is that it allows you to go through trial and error. During their startup stage, businesses will make mistakes. This is no perfect world and hardly ever good ideas on paper translate seamlessly into reality.
A business model is an essential tool for you to visualise the internal logic of your project, and try different points of balance as you go. Many companies had great product ideas, but only became successful when they understood what business delivered the most value to their final customer. A textbook example of this is Nespresso, which only became a global trend once its distribution strategy was correctly identified.
In fashion, like in many other industries, so much can change according to your customer segment, distribution channels, cost structure and ultimate value proposition, so much so that even the same collection can be both a great success or a total failure based on the way you fill out the business model canvas.
The only way to know for sure is trying, failing and persisting. This is what you need to do for the first few years. Not only this approach will allow you to fine-tune your operations, but it will build your character and get you to collect great stories from your own business experiences.
Once you have found a business model structure that feels right, you can think about writing it down, in a more technical format: the business plan.
Writing a business plan is not a simple task, but is doable. As for many other business documents a business plan in a mixture of form and content. A business plan has a structured format which comprises (usually) 5 sections. As for the content, the hard part is being able to provide a description of a business venture with no loose ends, and an overall consistent vision of intent.
Here’s a short description of its sections:
Here’s what you are expected to write for each.
The current size of the market, and its growth rate.
The current size of your market share, and its growth rate.
A famous consulting company called the Boston Consulting Group created a matrix to identify 4 categories of products on the grounds of these two factors:
Cash Cows. Big market share, small market growth. In this case, a company is usually very mature and is in an interesting position. On the one end, it retains a big slice of the market, on the other, the small growth of the market is limiting access to competitors. Companies in this category are not usually bought by other conglomerates – as they are very expensive to buy – but are usually over-exploited for profit as this ‘condition’ does not last for very long.
Question Marks. In this case, companies have a small market share, but in a market which is expanding. This is a great position to be in, as many early-stage investors are very interested in buying this type of company. If you are in this category, your odds of finding a good partner go up. This is the category you want to position your business in.
Dogs. Small market share, small market growth. If a market is small and a company has a small share in it, its overall profitability is dubious. Companies falling into this category are likely to be sold to gain funds to invest in other ventures.
Stars. Companies in this category achieve the best of both worlds. On the one hand, they retain a high market share while competing in a fast-growing market. Again, if you are in this segment, it’s unlikely that you would want to look for start-up partners, your business is already established.
Being able to determine the relationship between the value proposition and market growth is essential. Once this has been done, then a more thorough analysis of the market’s competitors is going to assist us in making our business proposal persuasive.
In this section of your business model, you are required to show that your ambitions are grounded in reality. By analysing the market you are required to have an in-depth understanding of who will be your competitors as you grow your business. Competition can derive from having a similar value proposition, or a similar business model to other firms competing over the same customer segment.
In all honesty, it’s unlikely that you are going to create a unique product with a unique business model, designed for a new category of customers no other firm is targeting.
However, you will have to try to create some element of distinction allowing you to differentiate your business from the competition. In business literature, we often use the metaphor of the red or blue ocean to differentiate two types of markets. The red oceans are red because of the blood drawn from fierce competition over pricing and customer retention. Developing a business over a red ocean is very difficult and sometimes pointless, as other companies are quick to replicate the success of competitors. Blue oceans are instead unexplored pockets of value where a company can create a value proposition capable of both reducing the cost of its products and services while amplifying the value that customers can draw from a purchase.
This is easier said than done, however, any entrepreneur should have a ‘value ace up the sleeve’ meaning that in your business you can’t only be creative about your fashion collection, you need to be creative and imaginative about the way you structure your business as well.
Before concluding this post we’d like to suggest an alternative approach to the business plan. You could ideally seek alternative or additional forms of validation to express the potential of your business in a non-ambiguous way. In this sense consider that investors are always interested in picking up trends. If your firm is gaining momentum and is drawing a larger and larger audience to its products, that in itself is a business plan too. According to our 5-Step Process to Starting a Business with Little or No Money a crowdfunding campaign can provide you with the market validation you seek.
A balance sheet. A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.
Profit and loss statement. the profit and loss (P&L) statement is a financial statement that summarises the revenues, costs and expenses incurred during a specified period, usually a fiscal quarter or year.
Cash Flow Statement. In financial accounting, a cash flow statement, also known as the statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
As a designer, you are not demanded to have a business degree in finance, but you should nonetheless have a basic understanding of what financial operations entail, considering that you are asking for funding.
Most people think that the greatest challenge in business is coming up with an idea for a product customers are interested in, but the truth is that ‘interest’ does not pay the bills. What you want instead is proof that your customers are willing to spend money to acquire your products. Crowdfunding is a valuable tool to test exactly that, whether your product can be sold, and at what price.
Crowdfunding, as we discussed in this post is a great way to bootstrap your project, but it is in itself yet another challenging process. Make sure that you focus on the goal and not on the means. Your goal is to grow your company, not becoming a business analyst.
As we have seen, there’s more than one way to impress a potential investor or business partner. As for all matters, seeing our business from the lens of a business plan is a very valuable tool to understand what we should do more, and what we are doing enough.
All in all, a business plan is a form of numerical validation and is persuasive towards those people who see the world in numbers.
For those entrepreneurs who are looking for a more market-oriented validation, crowdsourcing is instead an alternative approach, as it allows entrepreneurs to provide proof of their business’ potential by leveraging the community that a firm is able to foster around its product and services.
In both cases, however, the point is simple. A business cannot live only in the head of its founder, it needs to live outside of it too, by being shared with a variety of possible stakeholders and investors.
A business plan allows you to do that, by sharing both tangible and intangible aspects connected to your firm. It’s both an instrument of outside communication, as much as a form of personal introspection where we are demanded to write on paper what are our expectations and hopes with our projects.