At Dotcom, we've been in the eCommerce space pretty much from the beginning. Over the past fifteen years, we've had the pleasure to work with impressive fashion, beauty, and lifestyle brands. Because of this, leaders of those companies frequently ask me to share learnings even outside of distribution and logistics. One of the areas I am consistently asked about is funding. Many of the brands we meet are at that stage of their journey where they are now succeeding and are in need of funding for projects like large-scale manufacturing, enterprise technologies, broader marketing, and additional staffing.
Based on what I've observed, here are five things you can do right now to get ready to find the perfect funding partner.
1. Define Your Relationship Goals
The relationship between brand and investor can be complicated. Both want to look their best for their partner, but, when funding is involved, strengths and opportunities tend to get embellished. This means that you have to approach venture capital (VC) funding with equal parts caution and excitement.
Know which types of businesses VC firms are looking for. Typically, venture capital funding is given to early-stage, high-potential startups. In return for financial assistance, the VC firm buys a percentage of your company and earns equity.
2. Know Your Metrics
This seems pretty basic, but you'd be surprised how many people initiate conversations with funding sources without knowing the basic metrics these companies care about. Most VC partners use common formulas when evaluating companies to invest in.
The most common metrics are:
· Average order value
· Conversion Rate Percentage
· Site Traffic
· Customer Lifetime Value
· Customer Acquisition Cost
· Margin Produced by the Customer
· Cost of Customer Marketing
3. Search for Complementing Organizational Values
A VC firm's internal culture and value system are incredibly important as you'll typically work with that firm for three to five years. How a VC interacts with your brand will determine the success or failure of the relationship. VCs with a hands-on approach may offer more assistance, but they might also expect a higher degree of influence. VCs with a hands-off approach may provide less guidance and leave more creative control with you.
If a firm's cultural values do not align with your own, move on. These attributes can prove to be just as important as how much money a VC decides to give you.
4. Evaluate How a VC Firm Manages Its Portfolios
You'll join other companies under a VC's umbrella, so you should know who you'll be associated with. Much of the advice you'll receive from your investors will come from their previous work, so the successes or failures in their portfolio can be revealing. Ask yourself, "Does a VC have other folks in its portfolio that have the same challenges as me?" If it doesn't, the VC may not know how to support your business.
5. Determine a VC's Exit Strategy
When picking a VC partner, look at past successes and at how the VC terminates relationships. The companies a VC has worked with in the past are just as telling as those currently within its portfolio.
One of our favorite partners, Mike Miller of Blue Leaf Consulting, summarizes this best. "Divorces from VCs happen because the investment portfolio never took off or led to return on investment. Vice versa, sometimes you just get a bad VC. Separation does happen, so you want to find out these exit strategies up front."
If a VC has a track record of abandoning its investments, working with it means taking on additional risks. No matter the outcome, a VC should further your business goals after you part ways. While past successes are might be more exciting, take time to consider the failures, as well.
6. Take Your Time
Take the time to weigh your options and find the VC that is best for your business needs. The funding search and application process are about you and your company. After deciding that VC funding is right for you, match the VC's persona to your cultural, business, and long-term needs. It's possible to locate a VC partner with dollars and great management direction, but your first priority should always be finding the funding option that works best for you. For more details on how you can find the right funding/VC partner, check out Mike Miller's chapter on funding in our EMERGE in eCommerce ebook.