Building businesses around passionate communities of users

There is a great opinion piece by Lawrence Lenihan on Business of Fashion today arguing that we are killing many fashion startups by over-capitalising them relative to their market opportunity. Right-sizing funding is a topic that is dear to my heart, but the interesting point here is why over-funding is becoming a problem. Over funding is becoming a problem because the current generation of fashion companies are more niche focused than their predecessors. Here’s why:

The Internet completely changes the model of building a fashion company by enabling the creator of the brand to find customers first rather than finding a gatekeeper who controls the access to customers first. It removes the huge capital barriers to entry of building a physical store and the previous constraints around accessing a geographically diverse set of customers. It also provides a platform for community that enables a brand’s customers to participate in the building of the brand.

But, to stand out above the noise created by massive corporate brands, a new fashion brand needs to mean something more than the incumbents for a customer to switch. How can Nasty Gal succeed against H&M or Zara or Forever 21? By having a point of view! The brilliance of these new companies is that they recognised that people were craving for a point of view, something special and different and they gave it to them in a new form and in a way in which their customers participate almost as intimate friends rather than mere consumers…..

This sounds great except for one thing: by meaning something so much more to a given customer, they mean so much more to a far fewer number of customers (and might even alienate others who don’t share similar values, interests and aspirations). It has to be so: you mean more because you mean something more specific, something more special, something more intimate. Because they are so specific, by definition, the maximum market size for these companies must be smaller than the market sizes for traditional store-based concepts that must target more generally to survive.

This isn’t only true for fashion. There are also opportunities in other consumer industries to create intimate connections with customers by building community and having a point of view. Look at MakieLab in toys, Local Motors in cars, or DIY Drones in unmanned aerial vehicles. Success in this new world requires better products than of old and a passion or zeal that speaks to customers and that they can carry with them as part of their own identity. Authenticity and great communication skills have also become more important than they were before.