Financial leadership in the sustainable fashion revolution

In recent years, the fashion industry has been widely criticized for unsustainable business practices. But it may be on the cusp of a revolution in the way it procures materials based on reuse rather than new production. One company is at the forefront of this exciting trend, sustainable fashion company Circ. I spoke to Luke Henning, Chief Operating Officer of Circ, about how he oversees the efficient production process of sustainable textiles, tracks sustainability information and raises vital funds. In his role, he must combine financial expertise with solid investor communication and a vision for a new future for his industry—a combination that will become increasingly necessary for financial leaders as they work to build more sustainable businesses.

Jeff Thomson: Circ has developed a way to recycle textiles into originally equivalent raw materials for the textile industry, turning the linear system into a circular one. As Circo’s Chief Business Officer (CBO), how do you contribute to this strategy? What role does data play in enabling Circa’s mission? Given your mathematical background, how does data analysis impact your role?

Luke Henning: As CBO, I am responsible for our outward-facing activities with investors, brands and industry players. Working together as a close-knit C-Suite team, we craft a message for the industry, consumers and investors to educate them about sustainability in fashion, what circularity means and ultimately why it’s so important that we need to transform a polluting industry like fashion. I am often the voice of this message.

In addition to the traditional data used in research and development on the technical side of things, we also use data to measure the environmental impact of our process compared to traditional product manufacturing with the original product. One of the most widely used tools is life cycle assessment, which takes into account various factors such as energy consumption and logistics to evaluate a process to ensure it is net positive for the environment. This can help in making decisions such as the location of production assets.

I also work with data analytics to evaluate our product tracking and tracing systems. This is a key area as fashion is riddled with false reporting, counterfeit products and false labelling. I need to find ways that we can ensure that if a product says it contains Circ material, it does, and that if we label it as recyclable, it does.

Ironically, I barely use my math skills in my role. Heavy data analytics is coming to the side of engineering and scientific research. Most of my modeling is used for capital table scenario analysis and review and related topics which, while intricate, are not mathematically complex.

Thomson: Circ has an ambitious goal of recycling 10 billion garments (representing 10% of the global clothing market), which will save more than 10 million trees by 2030. However, there remains a gap between the goals and the actual realization of new production and distribution methods that are more environmentally friendly, because passing these costs on to consumers is not feasible. Who in the ecosystem pays for all the green innovations? How can CFOs reconcile the need for short-term investment in exchange for long-term profitability while maintaining cost efficiency?

Henning: As a society we are paying for the lack of green innovation. The cost is just masked. All that is happening now is that the direct financial cost is more open and more likely to be directly attributed within the industry.

That being said, the only way you can achieve real shifts in sustainability is if you make the transition as painless as possible or force it through regulation and level the playing field – what’s coming. Circo’s process is designed to be price competitive with unsubsidized virgin products when produced at full scale. In the short to medium term, we will charge a premium for circular materials. There will be significant premiums for circular products as a function of the dynamics of supply and demand for these materials, and it will take many years to replace the original materials with circular ones.

Not easy. We are disrupting one of the oldest industries that played a major role in the industrial revolution. We know that what we do is capital intensive and that “heavy technology” generally takes more time which affects payback times. This means we need to be very thoughtful about using capital efficiently while reducing risk and growing value as we transition to a company with long-term profitability. In order to attract capital, we need to ensure that the juice is worth squeezing.

What attracts us to investment is threefold: to ensure supply of scarce goods to reduce regulatory fines; gain market share through the possibility of offering sustainable products; and ultimately, because the technology adoption model is so large, any company that can capture market share here at acceptable margins will be an industry giant.

Thomson: Capital markets are increasingly willing to invest money in promising ventures in sustainable business. This summer, Circ announced over $30 million in Series B funding from the world’s leading apparel companies and venture capital firms, including Bill Gates-founded Breakthrough Energy Ventures. Can you describe your role in raising these funds and how you were able to successfully communicate Circ’s vision and potential to investors? How should other CFOs in the startup space seek capital? And what should CFOs look for in companies that invest in such ventures?

Henning: You need a strong and coherent message that clearly articulates why you are a category leader in your space. If you can do this, investors will share the opportunity with their network and leads will start to build organically, which is key because fundraising is a numbers game. You have to get out there and talk to potential investors and not stop talking to new investors until the money is in the bank.

My role was mainly to foster those relationships with investors and have the first few rounds of conversations with potential investors. You have to qualify investors as much as they qualify you or you will end up wasting valuable time. Once qualified, standard due diligence procedures follow. For those involved in sustainability, you need to be able to answer three questions: Can we? Were you supposed to? Shall we? “Can we” deals with the art of what is technologically possible. Is it even possible to do what you are trying to do? “Should we” refers to the sustainability of your process. Is this more environmentally friendly than virgin alternatives? “Will we” deals with the economics of solutions.

If you can’t compete on price or be close to the alternatives, then you’ll have trouble attracting enough customers for widespread deployment. If you can’t answer yes to all three questions, you will have a hard time raising the funds you need to build your business.

My guidelines are pretty simple. Look for investments in viable technologies that fit the long-term macro thesis, then find the best team working in that space. In the entrepreneurial world, twists and turns are expected, and you need to have confidence in the people running the organization and their ability to deal with uncertainty and pivot when needed.