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There are about 1,000 “unicorns” around the world, private companies valued at $1 billion or more, and only a handful of them are fashion or lifestyle companies. For a private fashion company worth over $100 billion, it was unheard of until Shayne arrived.
The Chinese fashion startup, known for selling cheap and trendy clothes online, was valued by private investors in April at $100 billion in a fundraising, making it the world’s third private company after TikTok parent ByteDance. Elon Musk’s SpaceX. For perspective, Sheen is now worth more than Zara and H&M, both of the world’s largest publicly traded fast-fashion chains combined.
Retail analysts wonder if an online retailer operating on a fast-fashion business model will be worth that much in 2022. And investors, no strangers to the booming startup ecosystem, are worried about how long Shin can last. Sky-high valuations at a time when capital markets are freezing and the company’s many internal problems are beginning to emerge, too big to be ignored.
In private market valuation, incentives often defy logic
When evaluating an investment in a private company, investors consider two things. The first is business basics: How much revenue did the company make last year? How fast is it growing? Does it have positive cash flow? Is it profitable?
The second is how similar companies have been valued recently – similar to looking at comparable properties in real estate. In fact, the thought process of buying stock in a startup is no different than buying a house.
“Your neighbor sold a house for $1 million. Similarly, you expect your house to sell for that amount,” says Swati Chaturvedi, a partner at Newton Fund, a San Francisco-based venture capital firm.
For startups valued above a certain threshold, usually $500 million, Chaturvedi said, comparisons become more important to investors than fundamentals. And after a certain point, the basics may seem irrelevant. When a company’s shares are particularly desirable, investors hold shares for fear of default.
“I don’t think there is a science. It’s just demand for supply. Susarita Kodali, retail industry analyst at market research firm Forrester, says it’s often about tokenism and what the investor is willing to pay.
That’s not to say Sheen doesn’t have any data to back up his scary speculation. During the outbreak, Shin was pleased with the development of the neck fracture. In the year By 2020, revenue is expected to rise 250 percent from last year to $10 billion, as homebound consumers shift to online shopping.
If those numbers are correct, a $100 billion valuation would give Sheen a 10x earnings multiple. Earnings multiple is a metric used by venture capital firms that measures a company’s equity relative to its actual sales. 10x multiples are seen in startups that grow more than 300 percent per year.
Shane’s growth trajectory is enough to justify its market value. However, it is still significantly overvalued compared to its publicly traded peers. For example, Spain’s Inditex Group, Zara’s parent company, generated nearly three times as much revenue as Schein in 2020, but it outperformed Schein by 20 percent when the stock peaked in May.
No one knows Shane’s secret formula
Shein was founded in 2008 in Nanjing, China under the name Dianwei Information Technology by Chris Xu, a Chinese entrepreneur about whom very little is known. The company started out as a wholesale retailer, connecting Chinese garment factories with foreign buyers. It officially became Shin in 2015 after acquiring Romwe, a Chinese fast-fashion company with warehouses and offices in California.
In fast fashion, every company is constantly working to strike a balance between small batches and economies of scale. The logic dictates that the fewer pieces a company can produce of a certain style, the faster it can get to the shelves and the less production costs it incurs if the style doesn’t sell. However, mass production is often beneficial to a manufacturer in order to reduce the cost of producing parts.
Shane pioneered the micro-batch production model, making only 50 to 100 garments per style and marketing to specific audiences, all thanks to his algorithm-powered demand forecasting tools. Meanwhile, Shin seems to have solved the economy-of-scale problem by cooperating with thousands of small garment factories in China. According to its website, Shin drops 1,000 new products every day, almost double what Zara releases every week. Most of the clothing retails for $8 to $30.
However, it all seems too good to be true. “Their whole model is cheap shit. There’s no other way to describe it,” said Forrester’s Kodaly. “I think the big question is: How on earth did they get cheaper in an already cheap world? How did they produce in such small batches while meeting their price point?”
While surprisingly low prices combined with social media marketing have helped boost Shayne’s popularity, the company has drawn critics. Environmental groups and fashion activists have accused Shin of exploiting workers, stealing intellectual property and creating excessive environmental waste.
Analysts worry that a tarnished reputation could hinder Shane’s future growth. “Fast fashion still caters to many consumer preferences such as value and convenience. However, a big factor in the fast fashion space going forward is sustainability – consumers are increasingly willing to turn a blind eye to unsustainable businesses,” said CB Insights analyst Liam Tuck.
Shin did not respond to a request for comment on his environmental, social and governance practice. In June, a company spokesperson misrepresented to Bloomberg that its business model “allows it to be more sustainable by reducing waste.”
As the market turns south, could Sheen be the next Klarna?
In April, the buzz around Schein was so high that the company told investors it would go public in the US as soon as 2024, meeting the expectations of its VC investors. But soon the US IPO market went dark. The number of companies going public in 2022 and revenue from initial public offerings has fallen. The downturn will inevitably trickle down to the private market, said Chaturvedi of Newton Fund.
“The price has come down a lot,” she said. “I believe private market speculation is completely insane. How can you maintain your market position when its public market counterpart has fallen in value?”
Chaturvedi said there is an opportunity to participate in Swedish fintech company Klarna’s fundraising round in December 2021 at a valuation of $50 billion. Klarna was one of the hottest startups in fintech at the time, but it turned down comparable companies to Klarna because they were publicly traded. It doesn’t look very promising. In hindsight, it was a good decision. Since July, Klarna’s valuation has fallen more than 80 percent to $6.7 billion.
For Schein investors, the biggest worry right now is performance.
In the year By 2021, Shin’s annual sales growth has slowed to 60 percent (250 percent from the year of the pandemic). Still impressive, but not enough for venture capitalists who value a company’s growth above all else.
Those warning signs prompted some existing Shin shareholders to consider selling their holdings at a discount of up to 30 percent from their $100 billion valuation in April, Bloomberg reported in July. Sheen did not respond to a request for comment on the report or whether he has any firm plans to go public.
If so, it may have a stronger audience to convince of its usefulness. “The IPO market is a more transparent market because there are a lot of small investors. You can’t fool a lot of people in the IPO market,” said Forrester’s Kodaly. There will always be a fool who wants to give you money.
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