Jalak Jobanputra is senior vice president of the New York City Investment Fund.

Historically the fashion industry has been slow to adopt technology, so most venture investors have stayed away from investments in the sector. But that has begun to change. Entrepreneurs are focusing on fashion-related online services, and more customers are willing to buy fashion items over the Internet, and investors are following.

Members-only fashion site Gilt Groupe managed to convince buyers to do their luxury shopping online. And Zappos, which sells shoes and other clothing, has shown online shoppers what strong global customer service and rich product assortment look like. It’s companies like these that have made investors take notice of the size of this market.

On the supply chain backend we’ve seen companies like H&M, Topshop and Zara move away from seasonal offerings to a higher velocity in new offerings, to serve the notoriously fickle fashion consumer, and enabled by more real-time inventory and flexible global manufacturing arrangement. In the next iteration, technology has enabled offline behaviors to be replicated online and to reach even larger, more global audiences than ever before.

The last bastion of exclusively offline retail, the luxury fashion industry, has historically prided itself on its high touch approach with customers and a notion of scarcity, which it considered at odds with the democratization provided on the web. This part of the industry believed in the tactile approach to clothes — they needed to be felt, tried on, with a sales consultant curating them in order to be fully appreciated. But as we continue to recover from the recession and these brands target the younger consumer, we are seeing a fundamental shift in the way fashion is curated and purchased. Market research Bain & Co. estimates that the online luxury market will grow 20% in 2010, despite the economy.

Over the past year in NYC, I have witnessed many veterans of the fashion industry joining forces with technologists to create the next generation of fashion companies. They are building upon lessons learned from the first generation of online commerce as well as years of experience in the offline sector. Some of these are tools and others are highly curated catalogs but they are all changing the landscape of the industry.

Let’s take a look at three different categories of companies in this field.

In the late 1990s, we first saw Bluefly and Overstock sell discounted, off-season wares online. Flat-rate shipping and free returns coaxed Internet newbies to make purchases online. Gilt Groupe emerged a few years ago to bring luxury sample sales online, democratizing these designers by offering them to people across the web, while also maintaining an aura of exclusivity — members had to be invited by affiliates or other members and had to be online when the goods went on sale, as they would sell out in minutes.

From day one, Gilt has been focused on providing excellent customer service, typified by the “handwritten” notes from the founders in every package and easy returns for credit. It has also refined data collection on its customers to the point of offering special sales to subsections of customers, including shoes in certain sizes. A couple of months ago, I was invited to the first offline Gilt sale, which was the most organized sample sale I have been too. The company offered invites by time window, and each customer was allowed a limited number of items. Gilt has refined the notion of mass exclusivity.

Gilt has recently leveraged its large consumer base to expand verticals and product offerings (including Jetsetter, for travel, Gilt City, for local deals, and Gilt After Hours, for those who are more likely to be online in the evenings than the traditional noon sale slot). As its product offerings and customer database continues to expand, I can see Gilt transitioning to more granular, customized sales and even potentially white labeling to department stores like Saks and Neiman (who have also recently started mid-day “dash” sales for select customers).

HauteLook, RueLaLa and ideeli have also received venture funding in the sample-sale space. They target slightly different demographics and have varying approaches to customer service and shipping (ie, drop shipping directly from the vendor vs. Gilt’s central warehouse). Additionally, MyNines recently received seed funding to build out an aggregation platform for the mid-long tail of sample-sale sites.

And we are beginning to see more geographic and vertical specialization as the potential audience size continues to grow: Exclusively.in just launched a site for hard-to-find, high-fashion Indian designers.

On the other end of the spectrum among these exclusive sites, Brooklyn-based Etsy provides a platform for mom and pop operations to sell their goods, ranging from jewelry to apparel to art, to a broad audience. The site has seen significant growth on both sides of the marketplace, with over 600,000 members and 120,000 sellers in close to 130 countries.

Meanwhile, Rent the Runway, founded by classmates at Harvard Business School, offers rentals for designer apparel, providing an option to those who can’t spend thousands of dollars on a dress they will only wear once.

The New York Times recently wrote a great piece highlighting two New York City startups, Go Try It On and Fashism, that let users take a picture of themselves and get fashion advice in near real time from the broader community. When I spoke to Marissa Evans, founder of Go Try It On shortly after the launch a few months ago, she communicated the highly viral, global nature of the service. People from Brazil were commenting instantaneously on someone’s outfit in the Midwest, for example. The power of this data and preferences would no doubt be useful to brands as they plan their assortments.

Styletrek, recently founded by Cecilia Pagkalinawan, an e-commerce and fashion industry veteran, plans to offer a platform for emerging designers with input on design and fabric from customers. This is a similar approach to what Quirky is doing with consumer product design, but bringing it to higher-end apparel. Modcloth, which started out offering vintage wares online, is also expanding to a crowdsourced model.

Having spent a good part of my venture career looking at recommendation engines, I was intrigued by this concept in fashion when I first saw Like.com on a trip to San Francisco a few years ago. A user would “train” the engine on his/her particular fashion sensibility by choosing between pictures of celebrities. At the end of the quiz, the site would tell you what fashion type you were (eg, Urban Sophisticate, Bohemian, etc) and then push special deals to you based on that fashion type.

But as more data is collected behind the scenes, from clickstream behavior and purchase patterns to Twitter streams, we are seeing recommendations that do not necessarily require direct user input.

West Coast-based Polyvore, which recently appointed tech industry veteran Sukhinder Singh Cassidy as CEO, provides a one-stop site for style advice, links to buy outfits and styles featured on the site, and the ability to drag and drop items to create customized outfits that you can then buy. Other sites, including Refinery29, provide aggregation of fashion blogs combined with product recommendations and links to purchase.

Giff Constable, who is launching Aprizi, a commerce discovery engine with a machine-learning back end, believes it is important to create an online browsing experience similar to offline discovery. When launched, his site will replicate the browsing experience by offering a range of products (including apparel), but in an even more customized way than walking through a department store.

So what’s next?
More customization, more diverse product selection and discovery, better targeting, more brands experimenting with mobile marketing (for example, we’ve seen upscale shoemaker Jimmy Choo partner with the location-based game service Foursquare to test out new types of marketing) — resulting in a win for customers globally and brands that serve their customers more efficiently. No doubt this will also create a new generation of commerce companies and attractive returns for investors if they bet on the right team.

Since we’re only in the second or third inning here, there will be shakeouts, consolidation and a few companies that emerge as winners. Several issues, including shipping, sizing and supply-chain logistics need to be addressed and executed upon properly to provide a seamless customer experience. And any online company must think globally. Even as consumer spending has slowed in the US, China and India are projecting near double digit growth, particularly in the luxury sector. Fashion has always been a fickle industry, but technology can help provide greater efficiencies if applied properly. As an investor, I find this sector one that offers great promise given its nascency and the amount of innovation we’re seeing.

Jalak Jobanputra has over 16 years experience in venture capital, media and technology, most recently with the NYC Investment Fund. She spearheaded the formation of NYCSeed in 2008, a seed fund dedicated to funding early stage tech entrepreneurs in NYC. She was previously a principal at New Venture Partners, a $300 million early stage venture fund that incubated technology at corporate labs. Prior to that, whe was at Intel Capital in Silicon Valley and was on the launch team of online financial information startup Horsesmouth in 1997, during which time she first discovered the NYC sample sale scene in Nolita. You can find her at @jalak and www.nothingventuredblog.com.

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