Archive for the 'vc' Category

29
Mar
08

Bag Borrow or Steal

I read this on John Cook’s Venture Blog the other day: Bag, Borrow, or Steal, a site that rents out super fantabulous handbags for like hundreds of dollars a month, has raised $15M dollars from Madrona, Steelpoint, and others.

Now I don’t doubt for a minute that the VCs saw something great about this business. And it’s easy for me to sit here, as a guy, a geek guy specifically, and say “what the hell did they see?” But, seriously, WTF? $15M fund raised? What’s the pre/post money are they saying?? Ok, maybe I should use my analytical skills and dissect this puppy:

  • Not many barrier to entry that I can think of. Anyone can do a me-too. Consider the bags themselves: If the bag is from Prada or Versace or any hot designer, even if it’s a limited edition, I assume there’s enough of them that someone can fetch the identical bag on the market and offer it. And if it’s one-of-a-kind (“couture vintage” in their catalog), then it may be too unique that you can’t readily flaunt it at a party since people won’t recognize it, limiting its appeal. Not to mention that the more exclusive the bag, the more expensive it was to acquire, raising the fees to an absurd level, such as the $4800 per month rental fee of their higher priced item. There are probably only a handful of women who would be (a) willing and able to afford that kind of rental fees, and (b) who isn’t wealthy enough to just buy it outright. Meanwhile, that bag is eating up $10K of your capital, just sitting on a shelf.
  • And since we are talking about shelves: This is fashion we are talking about, folks, so what’s the shelf life of a given bag? A super hot bag of the moment will probably not be worth so much two years from now, as the fashion trends turn. What would be the half-life of a bag? 2-3 years? Now, they seem to counter this issue by doing what Blockbuster does to old DVDs, and sell the old bags that aren’t being rented out much, freeing up some much needed capital to buy newer, more popular bags. I wonder what the depreciation of hand bags are? I imagine it’s not so great, given the constant churn of fashion.
  • Market: How big is the market size where people can afford to spend $100-200 to rent a bag for a month? I’ve got to imagine the Sex and the City market is not that large, that you are limited to only urban professional or wealthy women. Women in rural Iowa just don’t have a need to flaunt the latest fashion handbag every month; hell they’ll probably just get ridiculed at church every Sunday. I’m sure that the company probably has a track record to prove the segment does exists, but does anyone actually have demographic data to show how large it can scale? And don’t forget, unless you are some sort of Super Bag-a-holic, each customer can only have one bag at a time. But in their defense, they probably have a pretty good repeat customer rental rate, since their customer may just think of paying a monthly rate to constantly have the latest handbag.
  • Capital needs. These bags aren’t cheap, which is the reason why ladies don’t just buy them outright. The business requires alot of money being tied up in the inventory, which as we pointed out, has a limited shelf life. Meaning that if they are every wrong about a fashion trend and buy a bunch of bags that prove to be unpopular with the customer base, the opportunity cost can be huge. I sure hope they have a really great fashion editor on staff, who isn’t just avant-gard and knows what’s going to be hot next season. Which, in fashion, seems to be not a fool-proof game, given how often we hear about retailers suffering a huge downside when they bet wrong.
  • Marketing Cost: How much money did they spend to get the product placement on Sex and the City, The Movie? And that’s only one movie. They probably need to do this constantly, getting on Oprah, Martha, magazines and media.

There’s no doubt that the business opportunity is there. It’s just that it requires a large capital base to make it work. And has a limited upside, and won’t scale very large. And requires a large marketing expense on an ongoing basis. If I’m the VC, it’s hard for me to imagine that this company can return 10X on my $15M investment. I’m guessing the pre-money would be in the $50M range? How much would it be worth if this all works out? $200M? $300M? I’ve gotta think I can deploy my capital better elsewhere. How many startups can you fund for $15M? I would think you can do at least five, and everyone one of them can promise return better than Bag, Borrow or Steal.