Globally there are only about 1,000 “unicorns,” —private companies valued at $1 billion or more—and only a handful of them are fashion or lifestyle companies. For a private fashion company to be valued at more than $100 billion was unheard of—until Shein came around.
Shein, a Chinese fashion startup known for selling cheap, trendy clothes online, broke that barrier in April, when private investors valued the company at $100 billion during a fundraising round, making it the world’s third most valuable private company, after TikTok parent ByteDance and Elon Musk’s SpaceX. For perspective, Shein is now worth more than Zara and H&M, two of the world’s largest publicly traded fast-fashion chains, combined.
Retail analysts are baffled how an online retailer running on the saturated business model of fast fashion can be worth that much in 2022. And investors, while no stranger to the boom and bust of the startup ecosystem, are increasingly nervous how long Shein can sustain its sky-high valuation when the capital markets are cooling and the company’s many internal problems begin to surface as it becomes too big to be ignored.
In private market valuations, hype often defies logic
When evaluating an investment in a private company, investors consider two things. The first is business fundamentals: How much revenue did the company make last year? How fast is it growing? Does it have a positive cash flow? Is it profitable?
The second is how much similar companies were valued recently—similar to looking at comparable properties in real estate. In fact, the thought process of buying shares in a startup isn’t that different from buying a house.
“Your neighbor sold a house for $1 million. You would expect your house, which is similar, to sell for that amount, too,” said Swati Chaturvedi, a partner of Newton Fund, a San Francisco-based venture capital firm.
For startups whose valuation has crossed a certain threshold, usually $500 million, Chaturvedi said, comparables become more important than fundamentals to investors. And after a certain point, it may seem as though fundamentals don’t matter at all. When a company’s shares become particularly sought after, investors will snap up shares out of fear of missing out.
“I don’t think there’s a science to it. It is purely a supply-demand issue. It is often about hype and what the investor is willing to pay,” said Sucharita Kodali, a retail industry analyst at Forrester, a market research firm.
That is not to say Shein doesn’t have any data to back its monstrous valuation. Shein enjoyed breakneck growth during the pandemic. In 2020, its revenue skyrocketed 250 percent from the previous year to $10 billion as stuck-at-home consumers turned to online shopping.
If those numbers are accurate, a $100 billion valuation would give Shein a revenue multiple of 10x. Revenue multiple is a metric used by venture capital firms that measures a company’s equity relative to its actual sales. A 10x multiple is typically seen in startups growing at an annual rate of more than 300 percent.
Shein’s growth trajectory is almost enough to justify its market worth. However, it’s still wildly inflated compared with its publicly traded peers. For example, Spain’s Inditex Group, the parent company of Zara, generated nearly three times as much revenue as Shein in 2020, but it was worth only 20 percent more than Shein when its stock peaked in May.
No one knows Shein’s secret formula
Shein was founded in 2008 in China under the name Nanjing Dianwei Information Technology by Chinese entrepreneur Chris Xu, a reclusive figure about whom very little is known. The company started out as a wholesale retailer connecting Chinese clothing factories to overseas buyers. It officially became Shein 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 manufacturing in small batches and the economy of scale. The logic goes that, the fewer pieces a company can produce of a certain style, the faster it can reach the shelf and the smaller inventory costs it will incur in case the style doesn’t sell. However, in order to lower per-unit production costs, it’s usually in a manufacturer’s best interest to produce in large quantities.
Shein pioneered the model of micro-batch production, making only 50 to 100 garments in a style and marketing them to hyper specific audiences, all thanks to its algorithm-powered demand forecast tools. Meanwhile, Shein seems to have solved the economy-of-scale problem by working with thousands of small clothing factories in China. According to its website, Shein drops 1,000 new products every day, about twice the amount Zara releases weekly. Most of its clothes are priced between $8 and $30.
Still, it all sounds too good to be true. “Their whole model is cheap shit. There’s no other way to describe it,” said Kodali of Forrester. “I think the big question is: How on earth in an already cheap world did they get even cheaper? How did they manage to manufacture in such small batches while still achieving their price point?”
While its incredibly low prices, coupled with effectively social media marketing, helped boost Shein’s popularity, the company has also attracted critics. Environmental groups and fashion activists have accused Shein of exploiting workers, stealing intellectual properties and creating excessive environmental wastes.
Analysts worry a tarnished reputation could hinder Shein’s growth in the future. “Fast fashion still caters to many consumer preferences, such as value and convenience. However, a huge factor for the fast fashion space going forward is sustainability—consumers are becoming less willing to turn a blind eye to unsustainable business practices,” said Liam Tack, an analyst with CB Insights.
Shein didn’t respond to a request for comment on its environmental, social and governance practice. In June, a company spokesperson issued a bland statement to Bloomberg, saying its business model “minimizes waste and enables it to be more sustainable.”
As the market turns south, could Shein be the next Klarna?
Back in April, the hype around Shein was so high that the company reportedly told investors it hoped to go public in the U.S. as soon as 2024, fulfilling the hopes of its VC investors. But before long, the U.S. IPO market turned dark. Both the number of companies going public and the proceeds raised from initial public offerings plummeted in 2022. The slump will inevitably trickle down to the private market, said Chaturvedi, of the Newton Fund.
“Valuation has come down substantially,” she said. “I do believe that private-market valuation is completely crazy. When the public market equivalent have fallen so much in price, how could you maintain your market cap?”
Chaturvedi said her firm had the opportunity to participate in a fundraising round of Klarna, a Swedish fintech company, in December 2021 at a valuation of nearly $50 billion. Klarna was one of the hottest startups in fintech at the time, but she turned it down because publicly traded companies comparable to Klarna didn’t look very promising. In hindsight, it was a wise decision. As of July, Klarna’s valuation had plunged more than 80 percent to just $6.7 billion.
To Shein’s investors, a bigger worry at the moment is its flagging performance
In 2021, Shein’s annual sales growth slowed to 60 percent (from the pandemic year’s 250 percent). Still impressive, but it’s not enough for venture capitalists who peg valuation to a company’s growth more than anything else.
These warning signs have prompted some existing Shein shareholders to consider selling their holdings at a discount up to 30 percent from its $100 billion valuation in April, Bloomberg reported in July. Shein didn’t respond to an inquiry to comment on the report or whether it has any firm plans to go public.
If it does, it will likely have a tougher audience to convince of its worth. “The IPO market is a more transparent market, because there are a lot of smaller investors. You can’t fool as many people in the IPO market,” said Kodali of Forrester. “There are fewer people to fool in the private market. Not that investors are dummies, but if you are a great salesperson, often there’s a fool who’s willing to give you money.”