You know, I know and the world knows: e-commerce is booming. Honestly, that’s not a recent phenomenon: e-commerce has been quickly gaining share for the last 25 years. But especially in the current climate, a long-term trend has been put into overdrive. This has changed things for both entrepreneurs and investors.
Of course, this means of different investors wanting to put their money into e-commerce businesses. But how do you, budding entrepreneur or stressed-out founder, know the right route to take?
At the firm I work for, Outfund, we fund great online businesses across the spectrum and e-commerce is a huge portion of that. So Growthrabbit invited me to run through some of the ins and outs of funding your e-commerce business.
Upfront, it’s worth saying that there’s no single ‘best’ way to fund every business. There’s only the best way to fund your business.
Hopefully, this rundown will give you some pointers on what that is for you.
Ways to fund your eCommerce business
The first and simplest approach: pure organic business growth. Bootstrapping means growing the business without any external funding, investing in your growth from your profits. This is how many businesses start off and some founders pride themselves on never taking a penny of outside investment. It’s rarely 100% true though.
In fact, bootstrapping actually comes from a saying (“pull yourself up by the bootstraps”), which originally meant that improving your situation without any outside help is impossible. And to be honest, that kind of reflects the reality.
If you run one of those rare businesses which can bootstrap to infinity, you have my unyielding respect! But for a lot of businesses, bootstrapping for the long-term is slow and painful. It often means better-capitalised competitors can get a leg up on you too.
A famous example of a pure bootstrap e-commerce brand is Myprotein, a sports nutrition business that founder Oliver Cookson launched from his bedroom. His product perfectly coincided with the gym and bodybuilding boom and he successfully scaled the business to a multi-million-pound sale. He’s now worth around £300m, ample evidence of the benefits of bootstrapping IF you make it.
- Full control
- Keep everything
- No cost on capital
- Can’t invest to grow beyond what you earn
- Competition might overtake you
- Might never reach critical mass to take off
2. Venture Capital
Right now, venture capital, or VC, is probably the most glamorous way to fund a startup. VCs have large amounts of money to invest and are behind some of the world’s biggest startups. Unlike a loan, you’re taking on exciting, influential partners, rather than a liability you have to pay for every month. That can be a double-edged sword though. Yes, you gain a fresh voice and insight, but you also give up control and might have to compromise your vision and priorities.
The main disadvantage with VC comes in the long-term payoff though.
VCs exist to make money for their partners and investors, not primarily founders and employees. They probably want you to make some money too, but it’s not their overriding priority!
With a successful VC-funded business, you can build a very big company (hooray!), but by the time it gets there you could own much less of the business. You might have even been replaced.
As part of this, VCs will also often invest through a protected class of shares that means that if the company is sold or goes public, they’ll get their money back (or sometimes double or triple their money) before owners with less protected shares get paid.
VC can be a great option if you need to burn cash and absorb losses to keep the lights on and figure out the business model, or if you’re just starting out and need seed capital. But we find that’s less the case for e-commerce companies than other types of startups, as in e-commerce you’ve got steady cash flow built into the model.
Overall, VC has some advantages, but long-term it can be a very cumbersome and expensive way to grow your business.
A good example of VC-backed e-commerce businesses are the mattress startups, like Casper, Emma and Simba, that launched in the last decade. These businesses have tended to rack up heavy losses in marketing and selling so have needed large infusions of VC cash to keep going.
- VCs have deep pockets
- Strategic advice and connections
- VCs are usually cool with losses
- Usually no loss of cash flow to paying back the investment
- Give up control of your business
- Tricky negotiations
- Your business can grow undisciplined and reliant on losses
- Competitive screening
- VCs usually want to protect investments via preference shares
- Loss of equity/ownership
3. Bank loans and business lenders
Loans are the most traditional way to get investment for an SME business. There are a lot of operators, offering loans across a dizzying range of sizes, specialities and risk profiles. Usually, the higher the risk of the business – the younger and less-established it is – the higher the interest rate.
Realistically, a bank operates a bit differently to a specialised business finance firm. But the fundamental product is the same: a loan, a trance of cash with an interest rate to be paid back on a set time frame.
As above, the credit market is huge and you can get specialised loans for particular investments in your business that might reduce costs compared to a general loan.
Overall, business loans are a sort of middle-ground for e-commerce funding. If you can stay on top of the interest and are good at applications, it can be a pretty happy option. However, it’s also a fairly conservative way to fund and you might find it a bit slow and bureaucratic if you’re running a startup.
If things go badly, the interest payments can rack up leaving you paying more than you expected. Plus, depending on the loan agreement, you might be on the hook personally too!
- Cheap interest if your business is sturdy enough
- Lots of providers so you can shop around
- No equity giveaway
- Applications and relationships can be slow and bureaucratic
- You might need to give a personal guarantee and put your own assets up as collateral
- If you don’t keep on top of interest, the costs can get very big
4. Revenue capital
Now, this type of funding might not be too familiar as it’s relatively new. You’re in luck though, because it’s what we at Outfund specialise in. Unlike other forms of finance, this model is specifically built for sales-driven online businesses, like e-commerce and SaaS. It’s called revenue capital because the funding, plus a fee, is paid back directly via a revenue share agreement.
The idea is you get money upfront to put into sales growth drivers like online ads or inventory. Then rather than paying back the capital with loan repayments, you simply give up a share of your (boosted) sales until the money’s repaid.
Without the capital, you would keep 100% of the sales revenue. But with some revenue capital, while you might give up 10% as you repay, your total sales should be much higher with the extra funds you can invest: a slightly smaller slice of a much bigger pie.
You don’t give up any control, any equity or have any uncertainty on how much you’ll pay back. If you make fewer sales for one month, you repay less that month. If you make more, you repay more. But the total to repay never changes, only the time you take to do it.
If you don’t want advice or to talk to a bank, but just want some rocket fuel to put into stock or ads, this is the funding for you. Obviously, we’re a little biased but we think it’s perfect for any cash-flow positive e-commerce business.
A great example of an e-commerce business that uses revenue finance is 304, a D2C fashion brand. We at Outfund actually funded 304 and they’re one of our best investments. It’s still early days but we can’t wait to help them go to the next level and beyond!
- Full control of your business
- Pay back as you earn
- Flat fee – you know how much you’ll repay and will never pay any extra
- Flexible repayments
- Fast, easy applications
- Can combine with other forms of funding like VC
- No personal guarantee or risk to your own assets
- Have to be revenue positive and not too early stage
- Usually have to invest directly into growth, rather than working capital
- Have to show you can grow sales with investment
There’s a multitude of ways to back your business. Even in the basic approaches listed above, there are a bunch of variations and different structures that can leave you confused as to exactly what you’re risking and what you’re gaining. So keep your wits about you, even when a large amount of money is on the table!
Obviously, we think a lot of e-commerce companies would be best served by our revenue finance model. After all, that’s exactly why we built our firm to do just that.
However, I’d always recommend you go with what makes sense for your business, rather than some idea of the gold standard way to fund your startup.
And as an e-commerce entrepreneur who spends everyday selling, keep your wits about you when you’re selling your most important asset: your business.
If you want to scale your e-commerce business without giving up equity or taking a loan, head to Outfund now and sign up in seconds to see how we can help!
Toby Steinberg is Head of Marketing at Outfund, the alternative venture funder built for online businesses. He’s built growth functions and brands at creative agencies, startups and beyond.