MasterMind VSL ?? 7 DAY COUNTDOWN - MY #SETBACKS & #COMEBACKS / NO 6 : THE FABIFY JOURNEY

Back in October 2017, I joined the Board of Blackbetty (subsequently re-named Fabify).

Founder Phil Harwood had an ambitious plan to help big global fashion brands exit apparel overstock in a sustainable and ethical way - millions of tons of fashion apparel was ending up in landfill by 2018/19 and the entire industry recognised it had a public image problem that wasn't going away.

Equally any major western European brand didn't want its overstock appearing at heavy discounts (cannibalising full price on-line sales) on the high streets of the capitals of Western Europe : London/Milan/Paris/Madrid.

Around 10% of fashion ends up as overstock. What did I know about fashion? Well in 2014/15, likely bored and restless after leaving a French hedge fund, I had invested in a Bulgarian fast fashion on-line business called B-fashion (startup no 3 for me). That didn't end well.

I started a fledgling M&A business Mandacubed (startup no 4) around 2016 which we operated for 3/4 years, in many ways a forerunner, later informed by ExitValhalla (no 6) and Titan Partners (no 7) also both M&A businesses, for what I'm doing now with Mvrck Capital (startup no 8).

But the Fabify (startup no 5) business model was far more evolved than B-fashion from a financial perspective. Critically, we were partnering with big apparel brands from the outset (initially a major Eastern European brand, the Inditex of Poland), ultimately those partnerships included a wide selection of household high street brands, including for example Bershka, Inditex (Zara/Mango et al) and Superdry - many of those brands were sufficiently in tune with the corporate benefits of the Fabify partnership, to send parcels of overstock on consignment. This meant that technically we could be paying for a parcel of stock after we had already sold it, so this was a highly working capital efficient model.

We knew that off-price represented $38 bn p.a., or c.10% of the European fashion market $450 bn p.a.

We had open book accounting on each parcel of overstock and the net profits after marketing were split approximately 50:50 with the brands. The brands were recovering 3-4x the cash that they were previously recovering while having far more effective control over where their overstock was sold.

Prior to the model we were proposing (and other evolved on-line off-price models that have emerged in recent years), there was a much greater reliance in the fashion industry on somewhat "below the radar" multi-brand wholesaling operations, which moved trucks and vessels carrying containers of overstock all over the World (with likely a predominance of "cash transactions") - a nightmare for brands to "police" precisely which geographical markets overstock was ultimately being exited.

Our 2024 sales forecast of c$200m was still less than 1% of that European off-price market and we had hired a very experienced fashion retail and digital team during the pandemic when a lot of talent became hireable - these executives could get Fabify into just about any boardroom in Europe, simply because of industry networks.

The universe of comparable companies was conservatively valued at c. 8x revenues at the beginning of 2022 so a valuation north of ￡1 bn by 2024 was eminently doable.

On the flip side, the business operated like a finely tuned Swiss watch. There were a lot of moving parts. Inventory had to be shipped to our new warehouse in Bucharest (we relocated from a shared warehouse outside Warsaw in 2020), we re-branded from BlackBetty to Fabify in early 2020, embraced remote working during the pandemic and re-platformed the website from Shopify to Prestashop, to enable checkout in local currency in approximately 10 eastern and central European jurisdictions that we were targeting.

A key element of success was adjusting price discounts real-time (multi-country and multi currency) to reflect demand for each individual item of inventory and assure a rapid sell-through of each parcel of inventory in closer to 14 than 28 days.

Equally our experienced fashion industry buyers needed to assess the likely sell-through potential of each parcel of stock and estimate the discount to RRP required to achieve that sell-through.

Cost conscious shoppers (the average discount on Fabify to RRP was approximately 70%) in these jurisdictions (Romania, Bulgaria, Greece, Czech Republic, Slovakia, Poland, Slovenia, Croatia, Lithuania and Estonia) wanted to pay in cash on delivery - together with our fulfilment partner in Bucharest that managed an outsourced warehouse operation, we established complex delivery and cash collection operations to re-patriate cash to the company bank account within 48 hours of cash collection at the doorstep.

The 18 mth interlude of pandemic and the logistical challenges in a post BrexIt world of moving overstock around Europe didn't speed up our scale-up for sure. But we had experienced sales days close to $100k/day and knew that at scale our operations could and would fulfil and that net mature EBITDA margins were likely sustainable at 'a shade under' 20%.

However trading through the last 12 mths of the unwind from the pandemic period (Q4 2020 to Q4 2021) had soaked up a lot of invested capital in overhead which would have been better invested in digital marketing.

But the potential of what we had created was so attractive to global brands that early discussions with one such brand were underway regarding a partnership for a "full-price on-line model" that it proposed launching under its own on-line branding, where Fabify would handle all warehousing, distribution and cash collection in the eastern and central European markets (and assist with local website language and translation).

This was potentially a major extension of our model and could have been repeated with other global brands that didn't have existing operations in the emerging eastern and central European markets. In reality it was a brand extension that we didn't in any way forsee albeit it totally vindicated our belief in the Fabify model (despite countless people having been keen to tell us "THAT WILL NEVER WORK" - I reference the excellent work of Marc Randolph here).

However, by end of Q4 2021/early Q1 2022 there was still a funding gap of around $4 million, mainly required to scale the social media digital marketing which drove revenues to get the business to scale and start generating positive operating cashflow.

Investment discussions were proceeding very positively with a high net worth family office headed up by an individual who had experience operating in off-price fashion in the Asia-Pac region.

And then President Putin invaded the Ukraine in March 2022, there was a cost of living inflation crisis within a couple of months and fashion stock market prices plummeted, even Amazon was suffering on the markets because of reduced consumer on-line home deliveries.

Our carefully prepared business plan in 2017 hadn't factored in either a global pandemic (2020) nor war in eastern Europe (2022) and certainly not the subsequent cost of living crisis and the implications that had for cost conscious shoppers in Eastern Europe, now understandably more focused on mere survival and where to live safely.

Don't talk to me about only taking calculated risks. Unfortunately in business and in life some risks aren't calculable.

Subsequently, in the late summer of 2022 when fundraising for an Eastern European centered on-line fashion operation became impossible due to the war, the operations of the business were liquidated leaving the top company free of liabilities.

So what next? There's over 80 individual shareholders (mainly HNW) in Fabify International, 4 of whom control around 60% of the top company, now re-named Concha ('Shell' in Spanish, as in London a Special Purpose Acquisition Company, "SPAC" is known as a "Shell" Company).

And now we are on the hunt for a suitable acquisition target, with established trailing revenues, substantial growth potential and a sufficiently differentiated business model to command institutional support for a stock market listing.

Why is Concha (incidentally startup no 10) a SPAC, as it has neither a quote or liquid cash assets?

Well one of our major shareholders is an UHNW and access to cash for the right idea is straightforward enough.

As for a subsequent listing, well all 4 major shareholders (including myself), who hold around 15% each, have experience of reverse takeovers, so we know better than most how to execute the reverse listing.

The learnings?

Risk is not calculable (this is life).

Everything is recoverable with persistence.

#management #privateequity #startups #scaleups