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The Circular Economy: Backing startups overcoming challenges in rental, refill, and resale

Why We're Investing In

The Circular Economy: Backing startups overcoming challenges in rental, refill, and resale

Words Michelle Wilk

September 2nd 2021 / 8 min read

“Old habits die hard”. The saying has never rung more true than when it comes to shifting away from traditional, linear business models.

Retailers and brands are under increasing pressure to make their business models more circular. The recent IPCC report, dubbed “code red for humanity”, stressed the importance of speed in tackling climate change, with stark headlines driving home the need for immediate action. Net zero targets have created a race of accountability. Consumers expect brands to remain relevant to them overnight, in the same way we’ve come to expect an ever more on-demand economy. Yet speed is often the hardest part for brands and retailers to achieve here, through no lack of goodwill.

The problem brands and retailers face is not scarce consumer demand (78% are more likely to buy environmentally-friendly products, suggesting similar appetite for circular products), but a lack of technology and infrastructure to make switching to circular models as seamless as possible.

As a result, there’s a mismatch between consumer drive to be more sustainable and the solutions they’re met with in the mainstream market. That’s why we’ve actively chosen to invest in startups breaking down these barriers, and bridging the gap between supply and demand, via technology.

While the old adage may once have been ‘Reduce, Reuse, Recycle’, we’ve developed our own three Rs—‘Rent, Refill, Resell’—where we see the biggest shifts in consumer behaviour taking place. We’re tapping into these through our latest retail investments into Zoa, Reath and Dotte.

Here’s why we’re investing in the circular economy and the three R’s:

Why we’re investing in...

Refill

64% of consumers want brands to reduce packaging, citing this as their number one demand, based on a recent Deloitte report.

Solutions, such as refills, may seem all too easy to put in place at first. After all, refilling isn’t a new consumer behaviour. From packed lunches to transferring shampoo into a 100ml bottle pre-flight, we’re all familiar with topping up, or switching up, existing packaging.

At scale, however, a range of compliance and data issues arise, making it hard for brands and retailers to do as people do:

  • Reusing packaging removes vital batch codes. These are crucial for product recalls; without them, a business risks breaching compliance regulation.

  • This is further complicated by packaging being refilled with multiple different product SKUs and batches — all unpredictable at present, based on the consumer’s free will.

  • Companies need to select the most durable and environmental, yet cost-effective, packaging, leading to expensive reusable packaging trials.

  • Without data, there’s also no way to communicate the environmental benefit back to consumers, shareholders or the public, or to stay on top of inventory management.

We’re delighted to have invested in Reath, who have created ‘digital passports’ for refills, via their track-and-trace software, and in doing so, created the first open data standard for the circular economy. Reath enables businesses to capture and analyse business-critical refill data, and to train predictive models for future inventory management. This is crucial if refill is not just to be adopted, but to thrive, for both sides of the table.

Reath’s solution to the challenges with refill is so complete that they have already secured their first pilot with our partner, M&S, to use Reath in their Edinburgh packaging-free food refill aisle. Reath also partnered with the NHS during the peak of Covid-induced PPE shortages to test reusable PPE trials.

Refill, when tracked smartly via technology and data, has the potential to transform all industries from retail to healthcare, beyond sustainability.

Our investment: Reath

  • Consumer need & global impact: Current systems and legislation are set up for a linear flow of single-use items, rather than a circular system of reuse. This results in 380 million tonnes of single-use plastic produced each year.

  • What are they building: Reath software enables businesses to adopt safe, compliant, scalable reuse systems through a track-and-trace data layer.

  • Who’s building it: Claire Rampen (ex GiffGaff, Beryl, Telefonica) and Emily Rogers (ex LoveCraft, Thread)

  • Traction to date: Partnering with M&S in their packaging-free food refill aisles, and the NHS to test reusable PPE. Pre-seed investment from Techstart, CVC and Atomico Angels.

Their secret sauce:
Reath positions itself at the centre of the refill conversation. They authored reuse.id, the first open data standard for reusable packaging, and continue to engage with key bodies to help integrate it, giving them first-mover advantage in the space.

Rental

Carrie Johnson renting her wedding dress in June made front page news in the UK, but consumer demand for rental stems long before this. Millenials were the first generation to markedly favour experiences over ownership, with 64% of consumers renting items falling into this age bracket. It follows that - in an era dominated by sustainability, social media and selfies - the opportunity to ‘experience’ multiple looks less wastefully, and at a fraction of the cost, resonates strongly.

The US is at the very forefront of the rental revolution, with early players such as Rent the Runway paving the way since launch in 2009. Similarly, on the own-brand side, both Ralph Lauren and Urban Outfitters are some of the first big brands to launch their own rental propositions stateside. If applied in the same way as The Lauren Look, on a select range, a brand can benefit from dipping their toes in rental, before deciding whether to roll it out to the broader business. Given traction in the US (which tends to be one step ahead of Europe in consumer trends), and the sharp appetite for resale adjacently, we believe rental will be the next wave of disruption in Europe too.

So why are own-brand rental offerings not more widespread? While consignment rental models via third-party platforms (Hirestreet, Hurr, Rotaro, Rent the Runway) bridge a temporary gap for consumers, direct rental offerings are still met with hesitation by brands.

There are a number of reasons for this:

  • A fear of cannibalising full-price stock and, as a result, brand equity.

  • The need for bespoke software built from the ground up: a large cost beyond a brand’s standard ecommerce play (but essential to prevent the faux pas of double bookings, plus leave enough time for late returns and cleaning time).

  • Trepidation around maintaining unit economics, coupled with infrastructure barriers (such as specialist warehouses and cleaning facilities).

Our investment in Zoa’s B2B rental software tackles these problems head-on, enabling brands to directly share in a piece of the circular clothing revolution. The founder, Isabella, understands first-hand the struggles of operating a rental business, having also successfully founded Hirestreet. Seeing no existing off-the-shelf rental software solution in the market herself, Zoa was born.

Concerns over unit economics are appeased by dynamic pricing features and a ‘resale’ option for items crossing predefined depreciation points, keeping a brand in control. Complicated logistics are handled by a specialist third-party warehouse. Live booking availability, customisable rental settings, theming and cleaning time, are all baked into the software.

And as for brand equity and cannibalisation? The benefits a brand stands to gain from reaching new audiences through rental is huge in a D2C environment where CACs (Customer Acquisition Costs) are rising with increasing online competition. Gen Z consumers, who have sustainability credentials at their core, also have increasing purchasing power (accounting for 40% of consumers in 2020). For retailers to remain relevant to new generations, and trade with longevity, having a rental offering to reach new audiences is key.

Our investment: Zoa
  • Consumer need & global impact: The fashion industry needs to reduce carbon emissions by 50% over the next decade to meet climate change targets: rental is a highly effective way of doing this.

  • What are they building: ‘Rental as a Service’ white labelled software, enabling retailers and brands to launch their own rental offering.

  • Who’s building it: Isabella West (founder of Hirestreet)

  • Traction to date: Already powering the UK’s largest suiting provider, plus menswear startup Rathbones Tailor, with 2 new brands launching in September.

Their secret sauce:
Isabella launched Zoa off the back of Hirestreet, the UK’s fastest growing rental platform, giving her a firsthand understanding of the barriers to rental adoption and the way that consumers want to rent clothes.

Resale

The global resale market is growing at 11x the rate of the traditional retail sector (from a $7bn market size in 2019 to $44bn forecast in 2029) and could be worth 2x the fast fashion market by 2030.

There are a few catalysts driving this rapid growth. The first, and perhaps most pronounced, is the continued shift to e-commerce. Online marketplaces open up a much wider pool of buyers and sellers (and therefore inspiration - a key ingredient to drive both listings and conversion) than physical resale, which is bound by geography. “Technology is accelerating the pace of change of consumer behaviour when it comes to retail," explains Dominic Rose, ex-COO of Depop and Founders Factory Retail Sector Director.

The second driver is the pandemic, which has sparked a surge in new shopping habits as consumers prioritise both thrift and sustainability amidst an uncertain backdrop. 33 million consumers bought secondhand apparel for the first time in 2020 and this habit is expected to stick, as 76% plan to further increase their spend.

The third, and perhaps most ‘circular’, is the influx of funding into the space. Consumers have shown willingness to adopt new behaviours around sharing possessions, with appetite for resale models skyrocketing over the past few years. A quick look at VC funding and exit activity acts as a proxy for the output of this consumer willingness. This, in turn, ignites a domino effect, as businesses deploy this capital into digital marketing, new hires and platform investment, creating a virtuous flywheel.

The success of large resale players - such as Depop, Poshmark and Vinted - has also laid the foundation for consumers to seamlessly transpose their own purchasing behaviours onto the way they purchase clothes for their children. As audiences on these platforms mature, we expect them to move over to alternative platforms offering more relevant communities for their stage of life.

Our final ‘R’ investment is therefore Dotte; a peer-to-peer children's clothing resale marketplace. In Dotte, we saw a huge opportunity to back a startup to become a market leader in the more fragmented children's resale landscape, with no one player yet dominating the peer-to-peer space.

Our investment: Dotte
  • Consumer need & global impact: 350,000 tonnes of wearable clothing goes to landfill each year, with childrenswear in particular lending itself to shorter cycles. The average lifespan for kidswear is 2-3 months, with parents averaging 280 items of clothing before their child’s second birthday.

  • What are they building: A peer-to-peer resale marketplace for childrenswear, with B2B brand collaborations.

  • Who’s building it: Louise Weiss and Samantha Valentine

  • Traction to date: Official resale partner for 8 premium kidswear brands. Pre-seed investment from SFC and London Fashion Fund.

Their secret sauce:
Dotte aims to build more than a marketplace: a community of parents trying to live more sustainably and responsibly.

We’re proud to be backing the next generation of tech startups helping to bridge today’s gap which prevents refill, rental and resale from being adopted widely. While macro factors — such as France’s recent bill for large supermarkets to dedicate 20% of their stores to refills — go one step of the way, we believe technology solutions are essential to go the remainder.

Are you our next investment?

We’re looking for more companies making a global impact like Zoa, Reath and Dotte.

Founders Factory is an award-winning UK-based pre-seed to Series A investor, venture studio and accelerator for tech companies. We’ve helped launch and scale almost 200 businesses in the last 5 years. Interested in joining one of our programmes?

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About Michelle

Michelle is an Investor at Founders Factory where she leads investments across both consumer and B2B, with a particular focus on startups within the retail and beauty sectors. Formerly, she was a Growth Investor at BGF, investing £2-10m cheques into fast-growing UK SMEs. Prior to investing, Michelle started her career at Goldman Sachs in their Investment Banking Division covering TMT and Consumer deals. Michelle received an MA in French and English Literature from the University of Edinburgh, with a year at The Sorbonne in Paris.

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