Farfetch - The road to 1.7 billion dollars in revenues
How launching in the 2008 recession shaped the e-commerce luxury fashion leader.
When José Neves was a kid, he used to find fashion uninteresting and frivolous.
Growing up, he didn't have enough money to spend on luxuries and disliked premium brands. "Only rich kids can have its stuff and I wasn’t a rich kid.” he said.
Now, he's one of the most influential persons in the fashion industry and the founder of Farfetch, an online luxury fashion retail platform that disrupted an old industry and has a market cap over 17 billion dollars.
The beginning
Founder profile
José Neves was born in 1974 in Porto, Portugal, as the only child of a working-class family. He didn't grow up wealthy and he didn't like fashion.
When he was 8 years old he had the first decisive moment in his life - his parents gave him a computer as a Christmas present. It came with a programming manual and he learned how to code. He got addicted to it and it became a passion.
He studied economics at Porto's Faculty of Economics because he wanted to learn the business fundamentals to create a software company. While studying, he started his first business at the age of 19. It was a small company for producing and develop software.
It was then when he met his current CTO at Farfetch - Cipriano de Sousa - and they decided to develop software for the fashion industry, since there's a big fashion cluster in Northern Portugal. They focused mostly on shoes factories. It was with that experience that he started loving the industry and decided to make his own shoe collection.
In 1995, he launched his shoe brand called Swear, in London, with a physical and online store. In 2001 he launched another business - B-Store -, a multi-brand boutique that won the 2006 British Fashion Award for Retailer of the Year.
And then, everything changed in 2007.
Creating Farfetch
It was during the 2007 Paris Fashion Week that he had his lightbulb moment.
While meeting boutiques, he noticed that most didn't have on online presence and that the ones that were growing the most were investing strongly on online operations.
"We were at Paris Fashion Week, in October, looking at orders from the big companies that had bought the collection from us. And I realized a series of findings. First, the companies that were growing and that had greater financial health were the ones that had bet on ecommerce.
Second: there were hundreds of companies, both multi-brand and boutiques, that had no idea how to start or deal with this online issue, were excited about the opportunity, but frightened by the inability, whether financial or know how, to build these businesses.
Third, none of these large platforms - eBay, Amazon, Alibaba - would be compatible with the luxury fashion industry, because they are more massively approaching and do not understand the necessary subtleties of this market."
That's when he realised he could create an online platform that would help small designers or fashion retailers to become global players.
So he came back to Portugal to meet with his engineers and said:
"We will completely stop making software for logistics and we have one year, from now on, to move forward with a platform that connects multi-brand physical stores to an ecommerce website, in real time, with integrated logistics."
Everyone thought it was a crazy and extremely ambitious idea. Yet, one year later, Farfetch launched during the 2008 Paris Fashion Week with 25 boutiques in the platform, 300 designers and 4.000 products on the website. Farfetch's main innovation was that it was a technology-enabled retail model that didn't own inventory, unlike its competitors. Two weeks later, Lehman Brothers collapsed and the recession took full force.
Having launched in the recession, the early days weren't easy. For almost three years, the company was self-funded by José Neves, no one wanted to take the risk due to the recession. So he had to risk everything he had to make the business succeed. He used his savings, money from the other businesses and loans to fund the business.
He also faced the chicken or the egg causality dilemma: convincing the boutiques to join the platform without having yet the customers as track record. He convinced the first companies by showing that there was nothing to lose by joining: since Farfetch only takes a commission from the sales, if there are no sales there are no commissions.
“I used all the money I had, I took loans from my shoe business and lent it to Farfetch. If Farfetch hadn’t worked, I would have been bankrupt. The other business would have also been bankrupt and Farfetch would have obviously failed."
“But 2008 was good for us because luxury brands were open to new channels. Boutiques thought that the world is going to end anyway so we might as well try this crazy Portuguese guy and let’s see what happens.”
Scaling up - For the love of fashion
First investment round
Farfetch first investment round only happened in 2010 - three years after the company's start. Having launched in the middle of the recession meant that investors were more risk averse and the financing options were almost non-existent.
But that didn't stop José Neves.
"The idea was revolutionary, with great potential, it was such that if I didn't take a chance and try everything I would never forgive myself. In fact, this is the only advice I give: if it is an idea or a project that you would never forgive yourself if you did not give everything for it to be built, then you must go ahead and be entrepreneurs. If not, do not proceed."
During 2008, José stopped trying looking for financing due to the financial crisis. In the end of 2009, after an article published on the New York Times, several British VCs starting reaching out to them, motivated by the strong sales numbers of the company.
Around 10 of the best VCs in Europe contacted Farfetch, and they ended up choosing a Bristh fund called Advent Ventures in April 2010.
Since then, they raised more than 700 million dollars across 6 funding rounds prior to the IPO in 2018.
Building a community
Farfetch always believed in the power of building communities. They knew that they could only succeed if their partners succeeded. So they created Gatherings - an annual meeting between all key Farfetch partners. They used this as an opportunity to meet many boutiques and brand owners, receive feedback and explain new developments in the platform.
Hundreds of people would go to these events that would last a couple of days, and it has been widely considered to be a key driver to develop longstanding relationships with its partners.
In addition, the company launched in 2018 a tech accelerator program for startups called Dream Assembly. It serves two purposes: to give back to the fashion community, but also to build relationships with future partners.
Enabling physical stores, not disrupting them
Farfetch was never about ending physical stores, but rather add a second layer on top of them.
People still love to go to the stores and have the experience of trying the clothes. "The experience of physical retail will always be a part of the magic of fashion,” says Neves.
In 2017, Farfetch announced the Store of the Future. Its ambition was to seamlessly converge the virtual and physical experience through what they call as Augmented Retail. This is achieved by having an universal login for each customer that will enable a personalized experience in the physical store based on his preferences and previous purchases, and this experience would be the same in New York or Shanghai.
When they presented this to industry CEOs, it was a hit.
“We did a conference where we invited 200 CEOs from all the luxury industries. Chanel was there and that’s how they became our launch partner,” says Neves. “In 2019, we will launch in Paris with Chanel on Rue Cambon and we’re then going to start rolling out the concept to all Chanel stores around the world. After Chanel, we will certainly work with department stores and other brands as well.”
Eyes on the future through smart acquisitions
M&As are rarely about adding to the present value of the company, instead it's part of its long-term strategy. With that comes the risk of the investors not understanding the reasoning and sharing the vision behind these acquisitions. This has happened with some of the most controversial, yet game-changing acquisitions by major companies.
It's impossible to not see the value that YouTube brings to Google and how they complement each other, yet, this acquisition was widely criticised by the (at the time considered to be) outrageous valuation. Just this quarter alone, Alphabet reported $6 Billion in ad revenue for the period, 4 times more what they paid for the acquisition in 2006.
This is no different with Farfetch.
They have had three main acquisitions so far: Browns, in 2015, Stadium Goods, in 2018, and New Guards Group (NGG), in 2019. After the announcement of the acquisition of NGG - the parent company of Off-White, Heron Preston and Palm Angels -, Farfetch's shares dropped 40%.
But that didn't bother José Neves.
“The two biggest days ever on Farfetch were not Black Friday, Cyber Monday or Single’s Day. They were the two Nike Off-White launches we’ve done on the platform since the acquisition. The last one got 800 million hits on our platform.”
But what Farfetch really had in mind when acquiring NGC was the knowledge of manufacturing factories and use this knowledge to help designers coordinate their manufacturing. This connects to Farfetch's vision of empowering fashion designers and retailers.
Farfetch is on its path to becoming the global platform for luxury fashion. Built on resiliency, it has the necessary tools and ambition to achieve it and knows how to do it - by empowering others and connecting a community of creators, curators and customers.
For the love of fashion.
3 articles to read
The Farfetch journey, 10 years from start-up to IPO
An article from the first investor in Farfetch about key lessons that have led to the success of the company. Included is also the investment thesis behind it. Very interesting to see the analysis to consider the investment opportunity.
https://gulfbusiness.com/exclusive-interview-jose-neves-founder-ceo-farfetch/
Great interview from Gulf Business that shows how Farfetch is a enabler, not a disruptor.
https://www.gq.com/story/farfetch-new-guards-group-acquisition
An article from GQ analysing the reasoning behind the New Guards Group acquisition and its long term impact.
2 videos to watch
FarFetch: The $1 Billion fashion start-up | CNBC International
A 2015 interview to José Neves from CNBC about how the company started and operates.
Farfetch Partner Video - Legendado
A video from 2013 interviewing Farfetch boutique partners and what is the value they see in the platform.
1 podcast to hear
Great interview to José Neves that talks about dealmaking, internal culture and values.
Quotes to remember
“I always thought how can I create a platform to actually lift and empower these amazing brands, the designers and boutiques. I always had a respect for them, because I was one of them. At our core, we wanted to be a positive force for fashion, an enabler for this beautiful industry.”
“As a businessman and entrepreneur today, you need to abandon what people call ‘pattern recognition’, which used to be a friend but now is an enemy. Pattern recognition is ‘I tried to penetrate that market five years ago and it was a disaster, so forget it’. That will be an enemy because maybe that market wasn’t ready for you, and because you had that trauma, that scar tissue, it’s going to prevent you from taking that risk.”
Main learnings
Double down on your big ideas - Everyone thought they were crazy for pursuing this idea and doing it in the middle of a recession. Yet, despite what everyone said, they risked everything to develop this project. The most successful entrepreneurs are the ones that believe so much in their idea that they will do everything that it's necessary to make it become successful.
Build a community - Farfetch knows that the more successful its partners are, the more successful it'll be. As an enabler, it needs to continuously add value and build a community to solidify its position as the reference for this segment.
Enable others - The launch of its Store of the Future has helped its partners redefine their store experience, which, in turn, built trust in the relationship with Farfetch. Always search for ways to extend your relation with your customers and partners and they will reward you for that.
Have a long-term vision - The acquisition of New Guards Group resulted in a 40% stock price drop. However, the company believed in its long-term potential of integration with Farfetch's vision to empower its partners and proved its value. As Bill Gates says: "People often overestimate what will happen in the next two years and underestimate what will happen in ten."