Two years ago, Chic by Choice was Europe's premier designer clothing rental platform for women, operating in 15 markets. The Portuguese startup aimed to emulate the success of Rent the Runway across the Atlantic. But while the latter still goes from strength to strength, having raised a further US$125m in March in a Series F round, its European counterpart has since been wound down and sold to a competitor.
A unicorn, Rent the Runway has raised total investment of over half a billion dollars in the US, whereas Chic by Choice closed just two funding rounds in Europe, totaling €2m. Chic by Choice's demise raises some important questions. Are fashion consumption habits in the US and Europe really so different? If so, does that render business model replication in the sector challenging, as Chic by Choice's co-founders have asserted? Or was the startup's downfall due to other reasons entirely?
Pre-launch, Chic by Choice raised €500,000 in seed funding from Portuguese state investor Portugal Ventures and private investors Faber Ventures and Edge Group. A little over a year later, in November 2015, the startup received €1.5m from Portugal Ventures and Faber for its continued expansion in the UK and Germany.
By contrast, five years before Chic by Choice launched, Rent the Runway received US$31m in investment in three successive funding rounds during its first three years in business. The US giant was the inspiration behind co-founders Filipa Neto and Lara Vidreiro's decision to launch a European B2C clothing rental service.
"All women might have access to a dream outfit for every occasion, without having to invest too much in something they know they will only use once or twice," Vidreiro said in December 2015.
Allied Market Research forecast that, by 2023, the global online clothing rental market will reach US$1.85bn. In 2017, the European market was second only to the US, which accounted for 40% of the total.
Launched in 2014, Chic by Choice initially charged per item rented, ranging from €60 to €200 per rental. The rates were similar to those of Rent the Runway, but Chic by Choice did not follow the US business in having a subscription model, which generated 50% of Rent the Runway's revenue.
Both Chic by Choice and media asserted that, at the time, the platform was in uncharted waters with its business model. Luxury clothing rental did not yet exist in Europe. A first mover in this market would require a higher level of investment since it was promoting a service not yet a regular part of consumer shopping habits – support that Chic by Choice did not secure.
Until 2017, everything appeared to be going well for Chic by Choice. In 2016, the company registered decent revenues topping €278,000, a 90% increase over 2015. The platform housed hundreds of dresses, outfits and accessories from 40 renowned international designers. The company's350,000 users could rent clothing from the likes of ALEXIS and Valentino.
In 2018, the two co-founders made the coveted Forbes 30 Under 30 list. The UK was by far the largest market of the 15 Chic by Choice entered, accounting for 90% of the startup's business at its peak in 2016. Germany is the former home of La Remia, a luxury clothing rental site acquired by Chic by Choice for an undisclosed sum in August 2015.
Funding dried up
In 2017, the company was preparing to launch a Series A with the participation of a UK investor. The round was expected to bring in €3m–5m.
But the funding never transpired. The co-founding team stated that the potential UK investor pulled out after significant delays from Chic by Choice's proposed, and unnamed, Portuguese investors. The Portuguese investors' slow compliance with the terms of the proposed UK funding resulted in no deal being closed by either. Chic by Choice cited "timing issues." The delay meant Chic by Choice had received no new funding since 4Q 2015 to scale further and capitalize on 2016's growth.
Despite the co-founders' best efforts, the collapse of the round in 2Q 2017 made it "very difficult to embark on a new investment process again." The pair insisted additional funding was essential to accelerate growth. They also argued that startups are often loss-making during the early years and that great businesses "such as Amazon" can require years of continued funding before turning a profit. Indeed, US startups, including Rent the Runway, are commonly given more time to grow than European startups with less emphasis on earning revenue quickly.
“Multi-million rounds as a general rule, are multi-million losses until they reach a scale that permits sustainability,” said Neto in March 2018, while still insisting parties were interested in financing their rental business model.
However, the downward and irreversible spiral of the business had already begun. The first sign that all was not going according to plan came in 2017, when losses, largely brought on by international expansion and additional staff, exceeded €1m and, at year-end, the company was €28,000 in the red. Lacking liquidity and a way to further scale, the co-founders were forced to rethink the business model and drastically reduce operational costs in July 2017.
The pair decided to temporarily halt rentals and concentrate on selling end-of-season and end of range designer clothes and accessories for up to 85% of retail price. This short-term decision proved to be a disaster for the company's reputation. Additionally, in the sales segment, Chic by Choice was now competing with well-established e-marketplaces dealing in designer labels such as Amazon.
It later emerged that Portugal Ventures, with an 18.7% share in the startup, had abandoned Chic by Choice's Board of Directors in October 2016 for undisclosed reasons, and that it had cited the urgent need for a further investment round. The state VC later asserted that among its conditions were the “necessary sustainability of the business, which was not fulfilled,” but that it still wanted to help keep the company afloat.
Allowed to fail
When Rita Marques took over as Portugal Ventures' new CEO in early 2018, both she and the co-founders confirmed they were looking for a buyer for Chic by Choice. Marques stated that the startup was unsustainable and going into liquidation. Chic by Choice owed other businesses almost €73,000.
In the meantime, Chic by Choice remained open but barely functional, resulting in allegations that it was a ghost business with no operations or communication with clients. The company received many bad customer reviews claiming non-delivery of products or non-existent services.
Even though Chic by Choice insisted it was still operational, both co-founders began working full-time at other companies. Towards the end of 2017, Neto joined Farfetch as an innovation specialist and Vidreiro entered consulting firm A2D as a senior digital specialist. Both are still employed at their new jobs. At the same time, Chic by Choice's social media activity ground to a halt.
A buyer was finally found in the form of French platform Panoply City, though the price tag was not revealed and a recent Facebook post from Chic by Choice promoted Panoply as its "sister company." Panoply, founded in 2016, subscription service offers rentals starting from one item per week at a rate of €69/month. The company also sells discounted items, and, for now, delivers only to France, the UK and Belgium.
Meanwhile, Chic by Choice's website is still active and has started promoting single item rentals again. The startup has also resumed posting on social media. Panoply, which is keenly interested in Chic by Choice's UK-based customers, has argued that its potential customers would rather borrow "10 or 20" designer clothing items a year than "[buy] one or two dresses."
If Panoply succeeds in its mission, contrary to Chic by Choice's assertions, it will show the fashion rental model is applicable to Europe. However, it is still early days for Panoply, with its 10,400 Instagram followers and stated aim to "get at least 2,000 subscribers and pass 1,000 rentals per month."
For the moment, Chic by Choice's failure appears to have been caused by finance and management errors, especially in its external investment process, in a European ecosystem that is a bit more impatient for results than its US counterpart.