The Race to Find a Streetwear Unicorn

If you were going to design the closet of the world’s biggest sneakerhead, it would look a lot like Stadium Goods. The storefront a block north of Canal Street in lower Manhattan features hundreds of cellophane wrapped kicks on the walls, from a $35 Nike Toki Low TXT to a $34,000 Air Jordan 11 Jeter, the latter pair displayed behind glass in the Trophy Case along with other astronomically-priced shoes including an $8,500 Air Jordan 1 Retro High (“or as little as $880/mo”). Venture through another door and you'll find the Stadium Goods Market Center, where the growing company will happily consign your much-loved but unwanted sneakers, selling them in store or online for a 20 percent cut.

This model—a physical space along with physical products combined with a massive e-commerce arm—helped founders Jed Stiller and John McPheters, former hospitality and marketing executives, respectively, transform Stadium Goods from an idea in 2015 into a business that they say did $100 million in gross merchandise volume in 2017. Simple math reveals that to be a lot of freaking sneakers, and a significant portion of a market worth $1 billion and growing.

Sneaker consignment is not a new idea. Flight Club, just 15 blocks north, has been in the game for more than a decade, while consignment has been a staple of the vintage world for as long as cool kids have been selling their handsomely beat-up Starter jackets. The innovation Stiller and McPheters bring isn’t so much the business model as it is the lingo. They speak in the language of the tech bro – throwing around terms like “proprietary tech,” “customer acquisition,” and “huge year-over-year growth” in a recent interview. They’re clear in their ambitions: become a unicorn, the tech-world phrase for a company worth over $1 billion. Stadium Goods wants to be the friendly neighborhood shoe store—for the entire planet.

So far, it’s working. The success of Stadium Goods has drawn the attention of the sneaker world, as well as the eye of someone with a lot more purchasing power than the average customer: Julie Bercovy, head of LVMH Luxury Ventures.

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Even two years ago, a company the size of Stadium Goods never would have gotten on LVMH’s radar. The massive France-based conglomerate (full name: LVMH Moët Hennessy Louis Vuitton SE) owns more than 60 brands and subsidiaries, from Belvedere and Bulgari to Givenchy and Marc Jacobs. In 2017, the group’s revenue approached $50 billion, with profits of more than $6 billion. In the very recent past, a two-year old brand with sales that barely crawled into nine figures wouldn’t have been worth their time.

But last year, Bercovy, previously LVMH’s deputy head of mergers and acquisitions, made an observation. "I noticed more and more small brands when I was on the M&A team,” she told GQ during a phone call. “They had a real statement on fashion and beauty, and could challenge more established brands. I thought it was important to get closer to these brands. To be relevant to these smaller brands, we determined that we should take minority stakes. The idea is to make bets on emerging but already iconic brands."

She pitched her bosses on a fund that would buy small amounts of equity in emerging brands. The idea is to become involved with companies before they get too large, to help guide creative, visionary founders along the way. "My goal is first to create value and second is to create knowledge for LVMH, to share what I learn," Bercovy said.

In Stadium Goods, Bercovy saw exactly the type of company she wanted to help: a place with a strong hold on a market that elicited emotion and passion from its consumers. Investing now made sense, so, in February, she did. (Terms of the deal were not disclosed.)

For Stiller and McPheters, a call from one of the largest and most important names in retail provided validation. "There's no bigger cosign in retail than LVMH in general and in luxury specifically. We are trying to create a very aspirational brand here," Stiller said. "We carry hot brands. We are the manifestation of what's hot at the time.” Plus, Stadium Goods represented an avenue into a tough-to-crack sector, Stiller explained, one that every luxury company is trying it’s darnedest to break: “It was a way of LVMH Luxury Ventures getting into [the business of streetwear]."

Stadium Goods might turn into a unicorn; there's a good chance it won't. But the very notion that LVMH felt the need to launch a venture arm focusing on smaller, earlier investments into consumer product companies—that is, ventures that sell physical things—shows how investing in the space is changing. Retail isn’t dying; it’s fracturing. And everyone from global conglomerates to traditional tech-focused venture capital firms and consumer-focused funds like ForeRunner Ventures, an early stage venture firm that previously invested in Stadium Goods, are making bets on emerging brands, hoping to secure a massive return on investment by investing early and often.

If you’re a small, growing brand with a good story to tell (bonus points for a tech-adjacent business model), there’s money to be had.

Matt Scanlan got the idea for Naadam after spending time on the Mongolian steppe with a friend. He realized he could purchase the highest quality cashmere directly from the producers themselves, the nomadic herders who followed flocks of goats. But he needed $2.5 million to do so, and "no bank would give us that money," Scanlan said. Instead, he found a single wealthy individual who would loan him the money at a high interest rate. "It had to be a secured loan," he said. "The only security I could figure was a real estate asset, which ended up being my parent's home. We took second mortgage to collateralize the loan."

The ploy worked. Scanlan bought 60 tons of cashmere, made his products, sold them, then paid the loan back plus interest. (I have bought two sweaters and a polo. They are very soft.) Naadam had revenues around $20 million in 2017, up 400 percent from 2016, and Scanlan plans to raise $5 million to $10 million in venture capital early this year. Interest, he said, is high.

The appeal of the consumer products space to investors is obvious. There's a shitload of money involved, nearly $15 trillion in yearly revenue across the entire sector. (That's more than three times the entire tech industry.) And the rise of direct-to-consumer selling, social media-enabled marketing, the popularity and ease of e-commerce mean that small brands can grow rapidly.

As a result, investments are coming rapidly, from all over the spectrum. Foot Locker bought a stake in luxury activewear company Carbon38 for $15 million, Montreal-based clothing brand Frank & Oak got $16 million, Felix Capital—keeping in line with its "investment thesis focused on the Creative Class"—led an $8.5 million round into lifestyle blog-turned-brand Highsnobiety, and Sequoia Capital put millions into beauty brand Charlotte Tilbury. A company that specializes in packaging took in $9 million. On the higher end of the scale, Outdoor Voices got $34 million, Glossier raised $52 million, then bought its own design studio, while Supreme (Supreme!) took a rumored $500 million from private equity firm The Carlyle Group for 50 percent of its equity. And that's just from skimming the trades. The model is clear: get in early, get in often, repeat.

For consumer product companies looking to raise millions, finding the right partner is essential. That doesn't mean calling up the giants on Sand Hill Road, the Silicon Valley street where many huge VC funds have their offices. Building a business based on physical products, whether that's cashmere sweaters, backpacks, sheets, shoes, or perfume, is dramatically different than building a tech company. "Very few venture firms have the right relationships," investor Sumeet Shah said. "And most value-add consumer investors are least in the spotlight."

When Kevin Lavelle, founder of shirt company Mizzen+Main, went searching for money, he talked to a few tech-focused VCs but quickly realized that they weren't the right fit. He needed someone who understood making clothing and the retail world. "It's important to get feedback loop and the perspective of people who have done it before," he said. "It is just so fundamentally different to have professional investors behind you. They have so many opportunities to open up networks, open up banking relationships."

In the end, Lavelle got at least $10 million in private equity from L Catterton, another LVMH-affiliated company. The benefits became clear almost immediately. Lavelle wanted to expand Mizzen+Main's retail footprint by trying a test at Nordstrom. "I can call up our team at Catterton and say, 'Who in your portfolio has a meaningful distribution with Nordstrom?' They introduced me to one of those companies," he said. "It's having an understanding that you can't get from hustling." What started with a two-door test in February 2017 now has Mizzen+Main in 80 stores around the country, a dramatic increase of the company's wholesale business. Stadium Goods, meanwhile, will have a retail space in the Nordstorm’s Men’s Store that opens in New York City on April 12.

Surprise: there's such thing as too much money. Raising a ton means higher expectations, from investors and from the press. While Bonobos sold for just north of $300 million, most investors in the space consider it a failure because the company raised nearly $130 million at high valuations. This is a story no one wants to tell.

For Shah, less is more when it comes to getting outside capital. “You shouldn’t raise more than a Series A. You want to get revenue and be profitable, the right kind of profitable,” he says. “The ultimate goal is somewhere between $50 and $200 million in revenue. When you get there, you control your own destiny.”

Another problem with investing in the consumer space: a business based on consumer products doesn’t scale as easily or as frictionlessly as a tech company. Adding another million profiles to Facebook takes a bit of coding prowess. Selling another million pairs of Yeezys or sweaters or battery-powered suitcases requires vast amounts of physical space and inventory (and in some cases could depress the value of said product, which is created by scarcity in the first place). No amount of tech talk can change that reality.

Which isn’t to stay that Stadium Goods and other companies can’t reach unicorn status. Stiller and McPheters found a model that works; the injection of capital, connections, and knowledge from Bercovy’s team will help them see where it goes.

Naadam's Scanlan is another founder with huge aspirations. He sees massive growth in the U.S. as well as Asia, where luxury goods are taking off. "I think we're a billion dollar company," he said. "There's no reason why we're not. I tell people, 'I'm going to sell this company for half a billion or a billion dollars. If you invest $10 million now, you're going to make 100 times your money.'"

Is that an effective story?

He laughed, then said, "Depends who I'm talking to."

Still, it’s smart business to take these gambles. Bercovy and other investors who understand the space are making their bets, and the changing business models in fashion and retail mean they’ll get some bets right. Given the scale of a company like LVMH, 10 investments of $5 million are little more than a rounding error.

The issues come when unproven brands start raising the massive rounds: $30 million, $50 million, $100 million. Get too many of those wrong, and the investors will be left holding the bag. Or, perhaps, the shoes.