14 minute read

LONGVIEW: Caroline Brown "Always Marry the Impact To the Financial Benefit"

The fashion industry’s transition to a more sustainable business model will require a lot of money – and there is also a lot of money to make. That has attracted the attention of investment firms like Closed Loop Partners. Given Caroline Brown’s position as Closed Loop Partners’ managing director for fashion and beauty, you might assume she would talk exclusively from a financial point of view. But as the former CEO of Donna Karan International for LMVH, Brown draws from more than 25 years of working at the heart of fashion. In our conversation about circular fashion business models, including in retail, she even inspires us with the most traditional form of commerce: the farmers’ market.

Caroline, what is Closed Loop Partners, and what are your priorities and goals?

Closed Loop Partners is a New York-based hybrid investment firm and innovation centre focused on building the circular economy. We invest across a group of funds that start as early as seed and preseed venture capital, growth equity, private equity, buyout, credit, and debt. Our investors include some of the largest consumer goods and technology companies in the world, which gives us a very unique lens on the challenges of scale in the conversation of circularity. We also have an innovation centre called the Centre for the Circular Economy. It works with large businesses – some of them also investors in Closed Loop Partners’ funds – to help them solve the bottleneck issues related to circularity. In our day-to-day business that means that we look globally to seek out some of the most innovative companies in the world, to meet them at whatever stage they are in their capital journey, and to capitalise them in order to scale circularity.

For me, one of the most exciting aspects is that this means we are now entering an age in which circularity is becoming a competitive economic model. While circularity or sustainability used to be primarily seen as a PR vehicle, now it is interesting to investors. Why do you think we are entering this phase now?

I think it’s a mandate of any smart business today to be looking closely at their social and environmental footprint, as that has been a clearly expressed value set for consumers. And we know that any business that has chosen not to align to consumer values won’t be here very long, so it is smart business to take this step. One of the major drivers that I attribute to where we are today has to do with the conversation about transparency. The last four or five years brought a cultural change where there is an expectation of transparency by consumers on pretty much any product that they are interacting with. Marry that expectation to the growth of the technologies that can enable this transparency, like Internet of Things or blockchain, and you see a huge shift. Unlike before, customers are able to have a full view of how their product is made, what their relationship is to it, how they use it, and what happens at the end of its life. And so they are making decisions wisely based on that new information.

Today, the discussion about these decisions is primarily driven by ideology, especially in Europe, with market criticism and talk about systemic change. But I believe that it has to be economically successful to be successful at all. I would like to hear your opinion about the driving force behind the topic.

One of the major drivers of movements is financial impact. If you cannot marry a change to some element of financial benefit, it will be a very difficult road. I’m encouraged to see the fashion industry now attributing financial metrics to the transformation to a more sustainable and circular future. These are critical metrics that businesses are held accountable to. Look at some of the numbers: With the impact of waste, it is estimated that about $500 billion a year is lost in the fashion industry globally by operating in a linear way rather than a circular way. The opportunity for new use of recycled materials in the next few years is estimated upwards of $350 billion, and the development of fibres that are more environmentally friendly is expected to hit about $40 billion in the coming years. You can also see a reflection of the consumer mindset in the resale market: It is growing more than 20 times faster than the market for new products, and is on track to hit $62 billion in the next few years. These are meaningful numbers. And I think that it is our responsibility to always marry the impact to the financial benefit that companies can have. And you will find another benefit of a circular economy over a linear economy in fashion if you look at the number of customers that fashion companies lose every year. Companies are investing a significant amount of money to recapture, re-communicate and re-engage their customers. In a circular model, they inherently create an ability to have a continuous dialogue with that customer throughout the entire life cycle of the product, as well as when they are done with the product. So you can reconnect with them and keep that relationship strong.

Going back to numbers as arguments for a circular business model: profitability is a purpose that doesn’t carry the burden of emotionally charged moral or social aspects, so expected growth might be a good selling point for an undecided company. Is it also worth looking at the costs?

Absolutely. Let’s take the very basic example of raw material resources. Companies in a linear model will spend a lot of money to acquire their natural resources and the raw materials that feed their supply chain. In a linear economy, those most likely won’t have a second use, but will end up in landfill, as 85% of apparel ends up in landfill today. In a circular model, companies are wise about recollecting those raw materials and enabling them to go back into the beginning of the supply chain. That alone is an enormous financial metric. And what we as investors love are not only individual solutions by category in the supply chain, but also these emerging business models where that type of mechanism is built into their DNA.

Can you give an example?

We are invested in an organic basics cotton company in Los Angeles called For Days that works completely on a swap mechanism. There is no waste in the product lifecycle. That enables them to align to consumer values, but also to keep a continuous cycle of their raw materials through their supply chain. That requires a completely different product lifecycle management system and a different tech platform; it’s a different business model altogether.

“It is extraordinary how unregulated fashion is, given the size of the industry.”

So, let’s say there is a fashion company that needs money for its transformation to such a circular model. What kind of arguments are going to convince you or other investors to provide that money?

As investors, we look at companies that provide solutions for large corporations. We do not invest in large corporations, we invest alongside them, and many of them are investors in our funds. We allocate that money towards the early stage businesses creating the solutions for these companies to use across the whole supply chain. So we invest as early as design ideation, through merchandising, material science, clean manufacturing, transparency tools, recapture methods, renewed products, re-commerce, and advanced recycling solutions. Let’s take material science as an example: 95% of the product that we wear is made up by four or five fibres, and all of these are environmentally costly. Therefore, we are investing in solutions that can replace those fibres. Even to replace a small portion of a fibre with a sustainable solution would be extraordinarily meaningful when these large companies can then use them in their scale of a supply chain.

This could start with the complex topic of cotton.

Cotton is a very interesting topic, because consumers generally do not see its environmental weight.

Because it is considered “natural”…

Exactly. But actually, as we know, cotton is the largest user of pesticides. It takes a lot of arable land and clean water, and is an enormous contributor to water waste. But consumers will first adopt the categories that are clear to them. What is clear to them now is the heavy footprint of leathers or understanding the use of dyes. I also would say the whole area of waterproof materials, particularly breathable waterproof materials. These are ones that we expect consumers to adopt first.

With your background in the fashion industry, you certainly know its mechanisms and structures very well. Was your insight into what is happening globally part of your decision to work in the field you are in now?

Definitely. Before becoming an investor, I spent 25 plus years on the operational side of the apparel industry. It became clear to me that there is a very exciting future in the transformation of this industry to its next evolution, which I see as based on a more sustainable and circular future. But the problems related to that transition are so complex that solving them requires the level of creativity that comes with highly innovative, experimental companies. That inspired me to find ways to capitalize early stage companies that are not living within big fashion corporations. They are living in science labs; they are living in garages. This motivated me to look at the fashion industry from a different lens. I think the problems are so great in this particular sector that you don’t have to have come from within to have a positive impact in this movement. However, what has been extremely helpful for me is understanding the mechanisms into which these innovations need to be integrated. And secondly, I can see that one of the real issues is moving along a workforce to be able to work in a new way. Because the way clothing is made today has been fairly similar for the last 50 years, and it is important to understand what needs to happen to educate designers, product developers and merchandisers to even use these new tools.

“I think a triangle has to happen: an interdependent balance between incredible innovators, forward-looking companies and smart investors.” “A lot of experienced designers work the way they grew up with and they are comfortable with, which often means pencil and sketchbook. Migrating this workforce to, say, building 3D models will take time.”

Because the crucial thing in circularity is the design process…

The design process and the decisions made in the design phase predicate 80 to 90% of what happens at the end of life for a product. And if you can digitize that process, you can work simultaneously between design, merchandising and early stage production. Otherwise, it becomes three separate processes of physical products going back and forth. Once it’s digital, these teams can work in alignment, which saves in so many ways, including waste. But a lot of experienced designers work the way they grew up with and they are comfortable with, which often means pencil and sketchbook. Migrating this workforce to, say, building 3D models will take time. We can’t underestimate the time, money and focus that it will take to make some of these innovations viable in the execution phase.

Where do you see the biggest hurdles in the transformation that the fashion industry is facing?

I think number one is the enormous complexity and layers of the supply chain in fashion, which needs consistency and transparency. Number two is aligning capital. In this case, capital is the lifeblood of change. There are a lot of businesses ready to scale to meet the needs of large companies, but they need infrastructure and capital investment. To make these things come out of fiction into real life, I think a triangle has to happen: an interdependent balance between incredible innovators, forward-looking companies and smart investors.

This makes me think of another element that might turn the triangle into a square: Is there a role for government in this, too?

There is a role for government, absolutely. It is extraordinary how unregulated fashion is, given the size of the industry. Government regulation would be an accelerating element to this conversation. Can we rely on that consistently, globally, within the next five years? Probably not. Will it be there eventually, and should companies be prepared and be preparing for it now? Absolutely, because it takes time to do so. Across the global landscape, there are a few countries leading the way, but still, fashion regulation is only in its early stage. And in the interim and in the absence of regulation that triangle of investors, companies and innovators can begin to take those steps.

At Closed Loop Partners, Caroline Brown - former CEO of Donna Karan International – invests in early stage businesses creating circularsolutions that large companies then can use across the whole supplychain.

What are typical investment cases for Closed Loop Partners, apart from For Days?

For example, we invested in a company called The Renewal Workshop, which provides circular mapping for companies that can enable recapture, repair, renew, and re-commerce solutions for large corporations. This addresses one of the major gaps in the industry: If I produce a sweater that I say is recyclable, it doesn’t get recycled if it’s in the garbage. It requires a mechanism to get that sweater from your closet to the right centre which can recycle it. This is not the most glamorous part of the fashion industry, but it is critical. The Renewal Workshop is an enabler of a lot of the processes that help companies have a lesser environmental footprint and also participate in the secondary sale market of their own products, which is a great financial asset for them.

Do you also see a business model or an option for participation for retailers here?

Yeah, absolutely. In many cases, consumers are choosing second-hand first. And of course being able to offer what the customer wants is a great advantage for a retailer. Another one of our businesses is a company in Los Angeles called Thrilling, a tech aggregator of the very fragmented resale market for second-hand and vintage apparel. This company provides a sales platform for independent businesses that looks consistent to the customer and can compete in a global marketplace. And they work directly with certain retailers to curate special shops and special kinds of collections that they can sell alongside their fullprice merchandise.

“My personal view is that brick-andmortar stores are a really important part of the retail experience.”

How will the transformation to circular models affect brick-and-mortar stores?

My personal view is that brick-and-mortar stores are a really important part of the retail experience. And I don’t think consumers divide in their mind: “I’m now communicating with this company on brick-and-mortar, on mobile, on my laptop.” I just think they think: “I’m communicating with this brand,” and they are agnostic to the medium. Secondly, stores have always been and still are an incredible opportunity to showcase brand stories, to design a visual ethos that can inspire your customers and send messages about the brand without even having words. What does this environment look like? What is the music? Who am I interacting with? Those are all storytelling elements for companies. And I don’t think we want to lose those as an industry. It is also proven in the metrics that the more channels a consumer interacts with, the more they will buy from your company. One does not sabotage the other, they both enhance the other in excitement or relationships around the brand.

“We have incredible provenance, we have craftmanship, we have top level design and we have stories that start as early as the farm. Not taking full advantage of this narrative is a missed opportunity.”

For a long time, the predominant story in our industry was something like: “Fashion is cool. It’s glamorous, but we don’t care about the rest.” In this huge topic that we are discussing here, is there also a chance for a new narrative?

From a storytelling perspective, this is such an incredible opportunity for the fashion industry, which has not been as competitive as some other sectors. Just look at the experience of food today, with farm-to-table: You go to the market, you are meeting the farmer who created the product, there is a picture of the sheep, you know exactly where it is coming from, and you know what? It’s fascinating. And it makes the whole experience of food purchases much richer. So why would we not take advantage of that in the fashion industry? We have incredible provenance, we have craftmanship, we have top level design and we have stories that start as early as the farm. Not taking full advantage of this narrative is a missed opportunity.

I really like your comparison with the food sector and the farmers’ market. You go there, you see the producer, you get an authentic story – and that’s why you’re willing to pay more.

Exactly. And you also enjoy it more.