Believe it or not, but not every single company should be getting venture capital. While trying to get as much money as possible may sound positive, you have to understand what stage your brand is at and the amount that will work best for your growth plans.
There is a lot to consider when fundraising for your brand. If you have questions, we have answers because we spoke with several experts and investors on the do’s and dont’s of DTC fundraising during a recent Commerce Club event on Clubhouse.
Event Title: Let’s talk about DTC Fundraising
Carle Stenmark, Partner at VMG Partners
Michael Perry, Founder and CEO of Maple
Arati Sharma, Founding Partner of Backbone Angels and Co-Founder of Ghlee
Rhian Beutler, Co-founder and COO of Venntov
Kat Cole, COO and President of FOCUS Brands
Mike Duboe, General Partner at Greylock
In a rush? Here’s the tl;dr:
- COVID has moved the needle quite quickly. Customers would rather go to someone's individual website, and these shopping habits are definitely impacting the way that a lot of these brands are raising.
- Not every single company should be getting venture capital. And it's not because the money isn't available, it's because it's not right for their business.
- Your pitch deck should show an outcome of having deep customer insights and being able to build products to address that.
- If you're getting ready to raise and you're approaching angels, you have to do your research and bring investors things they’re passionate about. Find what investors would be most interested in your product, and don’t pitch to investors that wouldn’t fit your target customer base.
- The more clear the pain point that you're addressing is and the more acute the problem is, the better the product-market fit will be and that will be evident to investors.
- Investors look at the mission and then the founder-mission fit. Iconic brands have a mission that is driving the creation of that business, which will come through in the brand creation.
- Investors are often looking for founders they believe in. They will ask questions like: can they take the bumps? Are there gonna be able to navigate the natural things that will come up in this category? Do they already have the potential to have the relationship with key stakeholders that complement their skills?
Jump to a section you’re interested in:
- The current state of DTC investing
- Does Venture Capital make sense for every business?
- Understand who your investors are and their interests
- Tips to catch an investor’s attention
- Red flags investors look for when talking with founders
- Questions investors ask when hearing a pitch
The current state of DTC investing
- There's a higher uptick of DTC companies raising money today. Valuations are starting to look more like SaaS companies. Investors are now starting to see multipliers at 12X.
- Brands are exploring altnerative sources of capital, and many are better suited for these compared to massive, multistage venture funds.
- There are high SaaS mutliples on commerce enablement tools. Through Covid, brands have accelerated in terms of growth and the multiples are similar to conventional consumer brands with a premium because growth has been more sustainable over the past year.
- Consumers are all shopping at home. Right now, they would rather go to a website to learn more about a brand before buying from it. These changing shopping habits have impacted the way a lot of brands are now raising.
Does venture capital make sense for every business?
- Not every single company should be getting venture capital. And it's not because the money isn't available, it's because it's not always right for every business. If getting VC doesn't align with your business goals, then you shouldn't start taking huge checks.
- Businesses need to make sure they understand what comes with receiving VC. What is the overall expectation from the investor? Oftentimes, the less you raise the better off you're going to be because you'll have greater optionality.
- When it comes to DTC, there's an audience for every time of product. Knowing that, why take on VC funding with a pressure to grow at a scale you're not ready for? Since you will have an audience for your products, there's more freedom around building a product that is for that audience when you don't take on money.
- VC can unlock certain parts of growing your brand, but it can also take away freedoms. If you're not sure that you need the money, spend time calculating what you're doing and your business goals to make sure it's right for you.
Understand who your investors are and their interests
- Always research who you're pitching, and ensure they're passionate about your industry too. Use social media to learn more about investors. You can usually tell their interests based on what they post.
- Investors are interested in your data. Do you have returning customers? What's your churn rate? These things matter when they're deciding if they're going to give you money or not.
- Investors want to understand if you're positioning your product correctly in your market. They want to be able to dig through your product, what you're building, why you're building it and who you're building it for.
Tips to catch an investor’s attention
- Make sure you provide a clear pain point for why you're building your product. The more clear the pain point, and the more acute the problem is, the better the product-market fit will be.
- Make sure your brand story actually aligns with what you're doing.
- If you're in the very beginning stages of your brand, numbers (in terms of metrics) may not matter as much if the business isn't the right fit for the investor.
- Investors look at the mission of the brand and the founder-product fit. If the founder isn't invested in the mission or the mission isn't driving the creation of products, that will show.
- Founder-product fit is sometimes the most underrated thing that investors look at.
Red flags investors look for when talking with founders
- Is the problem you're solvin real? If your story authentic? As a founder, if you don't truly believe your product is the solution to whatever problem you see, then it's not an authentic product and that's a red flag to investors.
- Investors want to see founders with ambition. If they're aware of the struggles that come with entrepreneurship and understand the freedoms they're giving up, that's an important thing for investors to see.
- Investors want to see that the core values of the founder and the inspiration behind their business aligns with their values.
- Founders should be very invested and nerdy about their product. If the investor knows more about your product and the industry you're selling it in than you do as the founder, that's usually a red flag.
- Founders are going to be told that they're wrong a lot. You will also be wrong a lot. Being able to hear this and accept feedback is important to investors who want to work with you on scaling your brand. It's a red flag to investors if the founders are overly defensive.
Questions investors ask when hearing a pitch
- Investors often question if the founder pitching them can handle taking bumps. They often ask, "Are they going to be able to navigate the natural conflicts that come up?" and "Do they have the potential to have a relationships with key stakeholders that complement their skills?"
- Investors want to know what kind of leader you are. For example, if you're more about building the brand and being a creator, they want to make sure you have the ability to draw on supply chain and operations people to fill in the gaps you may not be as good at.
- After learning more about the founder as a person, investors have questions about the product and the brand itself. This is where numbers and data become important.
About Commerce Club:
Commerce Club was co-founded by Matt Schlicht and Ben Parr. Both Matt and Ben are the Co-Founders of Octane AI, a company that gives Shopify brands the ability to offer conversational commerce to customers on their sites; an experience replicating an in-store consultation and leading to curated product recommendations.
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