There are only about 1,000 “unicorns” (privately held companies valued at $1 billion or more) in the world, and only a handful of them are fashion and lifestyle companies. A private fashion company worth more than his $100 billion was unheard of until Shein came along.

Shein, a Chinese fashion startup known for selling cheap and trendy clothes online, broke through that barrier in April when a private investor valued the company at $100 billion in a funding round to TikTok. ByteDance, the parent company of ByteDance, and Elon Musk’s SpaceX. At a glance, Shein is now worth more than Zara and H&M, his two of the world’s largest listed fast fashion chains, combined.

Retail analysts are baffled that online retailers operating under a saturated fast-fashion business model will be worth so much in 2022. Investors are increasingly nervous about how long Shein can hold its ground, even though the startup is well aware of booms and busts in the ecosystem. Critically acclaimed when the company’s many internal problems began to surface as the capital markets cooled and the company became too big to ignore.

Hype often defies logic in private market valuations

Investors consider two things when evaluating an investment in a private company. The first is business fundamentals. What was the company’s revenue last year? How fast is it growing? Is your cash flow positive? Is it profitable?

The second is how similar companies have been rated recently. This is similar to looking at comparable properties in real estate. In fact, the thought process for buying stock in a startup isn’t all that different from buying a house.

“Your neighbor sold his house for $1 million. Yours should sell for a similar amount,” says Swati Chaturve, a partner at Newton Funds, a San Francisco-based venture capital firm. Mr Di said.

For startups with valuations above a certain threshold (usually $500 million), Chaturvedi said comparability is more important to investors than fundamentals. And after a certain point, the fundamentals may not seem to matter at all. When a company’s stock becomes particularly popular, investors buy up the stock for fear of missing out.

“I don’t think there’s a science to it. It’s purely a matter of supply and demand. A lot of the time it’s about hype and what investors are willing to pay,” says retail industry research firm Forrester. analyst Sucharita Kodari said.

That’s not to say Shein doesn’t have the data to back up its huge valuation, which has seen tremendous growth during the pandemic. In 2020, the company’s revenue surged 250% year-over-year to her $10 billion as homebound consumers turned to online shopping.

If those numbers are accurate, a $100 billion valuation would make Shein ten times more profitable. Earnings multiple is a metric used by venture capital firms to measure a company’s equity relative to its actual sales. A multiple of 10x is usually found in startups growing at 300% or more per annum.

Shein’s growth trajectory is nearly enough to justify its market value. However, it is still significantly inflated when compared to its publicly traded peers. For example, Zara’s parent company, Spain’s Inditex Group, made almost three times more revenue than his Shein in 2020, but only 20% more than Shein when the stock peaked in May. It wasn’t worth it.

No one knows Shane’s secret formula

Shein was founded in 2008 by Chinese entrepreneur Chris Xu under the name Nanjing Dianwei Information Technology. The company started as a wholesale retailer connecting Chinese garment factories with overseas buyers. He officially became Shein in 2015 after acquiring Romwe, a Chinese fast-fashion company with warehouses and offices in California.

In fast fashion, all companies are constantly working to balance small batch manufacturing with economies of scale. Logically, the fewer pieces a company can produce in a particular style, the faster it will hit shelves and the less inventory costs it will incur if the style doesn’t sell. , it is usually in the manufacturer’s best interest to mass produce.

Shein pioneered the micro-batch production model, creating only 50 to 100 garments in one style and marketing them to a very specific audience thanks to algorithmic demand forecasting tools. Shein, on the other hand, seems to have solved the problem of economies of scale by working with thousands of small garment factories in China. According to his website, Shein drops 1,000 new products every day. That’s about double what Zara releases each week. Most clothes cost him $8-$30.

Still, it’s all too good to be true. “Their whole model is cheap. There’s no other way to describe it,” says Forrester’s Kodali. “I think the big question is, how on earth did they get even cheaper in an already cheap world? How were they able to produce in such small batches while still achieving the price? Huh?」

Its incredibly low prices, combined with effective social media marketing, helped make Shein popular, but the company has also come under criticism. Environmental groups and fashion activists have accused Shein of exploiting workers, stealing intellectual property, and creating excessive environmental waste.

Analysts are concerned that the reputational damage could hamper Shane’s future growth. But sustainability is a big factor in the future of the fast fashion industry, and consumers are turning a blind eye to unsustainable business practices,” said CB Insights analyst Liam Tack. I’m here.

Shein did not respond to requests for comment on its environmental, social and governance practices. A company spokesperson issued a low-key statement to Bloomberg in June, saying the company’s business model is one that “minimizes waste and makes it more sustainable.”

Will Shein be the next Klarna as the market goes south?

Back in April, the hype around Shein was so high that the company reportedly told investors it hoped to go public in the US in 2024 and wanted to meet the expectations of VC investors. But before long, his IPO market in the US went dark. Newton Fund’s Chaturvedi said both the number of companies listed and earnings from initial public offerings plummeted in 2022.

“Valuations have come down a lot,” she said. “I think private market valuations are completely insane. How can market capitalization be sustained if the public market equivalent falls significantly?”

Chaturvedi said her company has an opportunity to participate in a funding round for Swedish fintech firm Klarna in December 2021, valued at nearly $50 billion. Klarna was one of the hottest startups in fintech at the time, but she turned it down because there are publicly traded companies to rival Klarna. It didn’t look very promising. In hindsight it was a wise decision. As of July, Klarna’s valuation has fallen more than 80% from his, to just $6.7 billion.

Poor performance is a bigger concern for Shein investors at the moment.

In 2021, Shein’s annual sales growth will slow to 60% (from 250% in the year of the pandemic). Still impressive, but not good enough for venture capitalists who tie valuations to company growth above all else.

Bloomberg reported in July that these warning signs have prompted some existing Shein shareholders to consider selling their stakes at a discount of up to 30% from April’s $100 billion valuation. Shein did not respond to requests to comment on the report or to ask if there were firm plans to publish it.

If so, it will be a harder audience to convince of its value. You can’t,” said Forrester’s Kodali. “Fewer people get cheated in the private market. It’s not that investors are stupid, but if you’re a good sales person, there are often fools willing to lend you money.” ”