👋 Hey there!
This post is part of our Field Guide to DTC eCommerce Capital. Click the links below to read more chapters from the guide.
Capital Is Just a Tool
A Word on Focusing Your Time
If you read the headlines on TechCrunch and VentureBeat, you may start to get the impression that closing a round of VC funding is a sign of success in and of itself. But as many jaded ex-founders who have been forced out of their own companies or seen the doors close altogether with little to show for their blood, sweat, and tears can attest — it’s often not all it’s cracked up to be.
The reality is that taking on outside funding should only be done thoughtfully and strategically. Furthermore, different types of capital should simply be seen as tools you can add to your toolbelt. Not all capital is equal, and understanding the fundamentals of each option (and how they do or don't work together) is key to making decisions that ultimately push you toward optimal outcomes rather than unsatisfying endings.
We see founders spend a lot of time and energy chasing capital sources that are not suitable for them. Founders often chase VC when they are not really VC fundable — meaning they are unlikely to see the growth multiples that VCs (and their limited partners (LPs)) will ultimately expect in return for their investment.
Based on our data, we estimate that VCs provide capital to about 1% of all US eCommerce companies doing between $5M and $50M in sales. In other words, VCs largely recognize that e-comm isn’t the right profile for their investing strategies.
Even if a particular DTC business model is the right profile for VC funding, founders often waste time chasing firms who are wrong for their stage or industry and thus will never bother meeting with them or funding them if they do.
What’s true of VC is also true of debt. Just like VCs, lenders have specific mandates for the types of deals they will do. There is no point chasing those deals if you don’t fit their mandates.
“What’s the harm in trying?” you may be asking yourself. In reality, chasing the wrong types of funding may be costing you more than you think. For one, your time and energy are finite. Don’t waste them. Going after inappropriate sources of funding can prove to be a massive distraction and lead to wasted time, effort, and energy (read: money!) We are speaking from experience here.
Inevitably, when DTC companies chase VC or debt funding, they will spend a lot of time doing things like tweaking sales decks, refining business plans, editing elevator pitches, and crafting data models in an effort to win over a potential source of funding. Then they scour LinkedIn looking for anyone they know who might be able to get them an intro to a firm.
That might sound like a good use of time, but it’s often wasted effort. It’s important to know what the right type of capital is at a given stage of your business, and to be strategic about seeking it out when the time is right. That’s what this eBook will help you do: Focus on identifying and choosing the right capital “tools” for your near-term and long-term goals.
A Primer on Capital Tools for DTC Businesses
As you grow your business, your ability to leverage the right capital tools at the right time will determine the level of your success. In fact, we would argue capital selection will be the single most important determinant of size of outcome for your company. That’s a bold statement, we realize. “What about my awesome eye for products or our killer Instagram marketing strategy?” Those are, of course, important — foundational, arguably. But the ability to choose and deploy the right types of capital at the right time will give you the tools to maximize your potential.
Why? Well, DTC and e-commerce are operationally complex, capital-intensive businesses. You have to master product development, merchandising, marketing, paid advertising, international supply chains, logistics, customer service, talent acquisition, management, and financials. That’s a lot of skills, platforms, and data.
The capital intensity comes from the working capital needs of DTC businesses. When you buy from suppliers, you are often paying for goods long before you can sell them. The faster you grow, the more cash you have to have on hand to pay these suppliers. In nearly every case, you are also spending gobs of money on ads and marketing. After all, there’s no point in having all this inventory if no one knows about it.
So, over to Facebook and Google you go. And then your capital needs increase again, because you are now paying for ads before making money from your customers. This is called the cash conversion cycle. A positive cycle means you are paying for future sales before you realize them. A negative cycle means you get paid by your customers before you have to pay for your goods. And while a negative cycle may sound impossible, some companies do pull it off (Amazon, Gymshark.)
It’s much harder for DTC e-commerce companies getting off the ground to do this. That’s why the elation of landing a big order from Wal-Mart often quickly turns into fears about how you’re going to pay for that inventory ahead of time. By extending its own terms, Wal-Mart is just using you to create their negative cash conversion cycle.
You can see why capital management becomes so important, and so tricky, for DTC brands.
Capital Management Strategies
There are really only two ways to get the capital you need:
- You make it yourself through profits.
- You get it from someone else. (A note: Even if you personally have a lot of cash, you are still borrowing the money from yourself, because you could be investing your money in something else. Alas, the stories of entrepreneurs bankrupting themselves are legion.)
When you take capital from someone else, you are “renting” it. When you borrow money, you must later pay back the money plus interest for the use of that money. When you raise equity, you are getting money now in exchange for more money (hopefully) at some point in the future. The technical aspect of selling shares and redeeming shares is just the mechanism by which the parties decide that some money today can be worth some more money (hopefully) in the future. The cost of renting that money will be driven home when you see those wires go out to your investors. You won’t be able to stop yourself from thinking “some of that could have been mine.”
Here’s where it gets interesting: It’s simply the how and when of paying money back that defines the variety and complexity of capital products.
Another way to think about the equity vs. debt decision: You, as the owner(s) of the company, pay the “rent” on equity. When you sell shares, you decrease your potential returns down the line. On the other hand, the company pays the rent on debt. That’s a key difference and one worth understanding before you make any decisions about capital.
How to Use this Guide
Throughout this guide, we’ll lay out the different types of equity and debt available to DTC and eCommerce founders, along with the pros and cons of each option. As you educate yourself on each option, keep the following questions — specific to your unique business and situation — in mind:
- What stage of growth are you in?
- What is your business growth strategy?
- How much capital do you need, and what do you plan to do with that capital?
- What are you willing to give up for that capital?
- How much time will you need to use the capital you receive?
- How do you want to repay the money?
- What are you willing to risk to fund your business?
- Do you want guidance in growing your business? What kind of partners and guidance are you looking for specifically?
About Bainbridge (a.k.a. Why Listen to Us?)
Wondering why you should listen to us? Bainbridge's founders combine a long history in the eCommerce analytics and business intelligence industries with capital markets and corp dev experience. We’ve taken that knowledge and built a data analytics platform specifically for DTC eCommerce brands. With Bainbridge, you gain access to a community of other DTC founders, and step-by-step playbooks (like this one!) with advice and insights about how to run a successful DTC company. It’s more than a product. It’s also a community of entrepreneurs and business leaders just like you, learning from one another about how to build a DTC brand that customers love and trust while maximizing the bottom line.