How to Raise Venture Capital for your Ecommerce Startup: 8 Things you need to know about VC Funding

ecommerce-startup

We all know that ecommerce is a resource hungry and fiercely competitive business to run. You need sufficient funding in order to achieve your potential success. At ILFR, we get many emails from our readers asking us questions related to funding their business and many of these questions are specifically about VC funding. And since Venture Capital as a funding source has evolved a lot in the past few years, there is much confusion in startups about raising VC money for their business.

For example – in older days, to be able to raise VC funding – all you needed was a powerpoint presentation, partner and may be a dog. There were VCs who’d buy your dream. And they were OK waiting for 3-4 years to make profits from their investment. Not any more. VCs are much smarter now. They want to make profit from their investment and they want to make that profit not in years, but few months.

If you’re an ecommerce start-up and considering Venture Capital as a funding option in the near future, this post can help you be more strategic about funding your business. These are 8 things you should know about VC funding if you’re a start-up ecommerce business and we’re sharing them in an FAQ format, the same way we’re asked about VC funding.


 

1) Should I bootstrap my ecommerce business?
As a technology company, I love the idea of bootstrapping. In fact, that’s how we’re building I Love Fashion Retail as a company. We’re bootstrapping my business thus far.

Unfortunately, ecommerce in it’s current form and because of its nature is one of the hardest business to bootstrap. If you really want to bootstrap your business, you need to pick the industry and business model that’s favorable to bootstrapping. For example, companies such as Huckberry could bootstrap their business because they chose a business model in which they didn’t have to invest in inventory. Here is an excerpt of their Founder’s interview on the ‘Art of Manliness’ blog:

I think Brett there are sort of a few things. When we were sort of standing on the ledge of whether to jump into this or not, I think one of the sites and blogs we read a lot and that we really subscribed to was 37signals, I guess their blog is called Signal vs. Noise. And the Founder Jason Fried, I sense written a few books, Rework, I think there is like one or two others. And he is just a huge fan of bootstrapping your business and I think it was sort of in our DNA and that like we graduated from school, went into a white-collar job. But I think we have a pretty like blue-collar mentality when it comes down to it and that we both love getting our hands dirty and kind of rolling up our sleeves and picking up Photoshop for dummies. That’s how we designed the site and just doing things really, really cheaply. So I think that was sort of – and honestly that we are pretty lucky to choose a business model where we could sort of afford to do that and that like if you’re starting a button-down or a button-down t-shirt company and your sort of capital requirements for that. You have to pay money six months before you can actually – to buy the fabric and get it, cut in some and then you launch it to the public and your capital cycle is getting paid six months after you cut that first cheque. We were lucky in that. Starting in the beginning it was primarily sort of a presale model with our customers. So it’s a combination of wanting to kind of control our own destiny which is what bootstrapping allows you to do. Choosing a business that sort of allowed us to bootstrap and that was bootstrap friendly. I think one of the things we say to every entrepreneur is like if you can – if you can afford to bootstrap your business, absolutely do it. We’re huge fans of it, but we also recognize that it’s one it’s not for every model, it’s not for every person and there are absolutely some tradeoffs in that. We definitely grow a lot slower than we could and part of that is just risk talent, but also if we raise money it would be kind of pedal to the metal. But I don’t know, it’s like I think in many ways is particularly on. You’re just trying to like find your nation and find your voice and find yourself and find the business. And I just think it was nice not raising venture capital and sort of being forced to just grow like crazy when maybe you’re not even growing the right business.

2) What’s Venture Capital?
I like how Wikipidea explains Venture Capital. It’s fairly accurate:
“Venture capital (VC) is money provided to seed, early-stage, emerging and emerging growth companies. The venture capital funds invest in companies in exchange for equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology and IT. “

3) Who’re Venture Capitalists?
Most ecommerce business require tremendous amount of money at the early stages – for product development, marketing etc. And sometimes, you can’t wait for 5 years because then your competitors with more resources than you will eat up all your market share. When you’re in a situation like this, Venture Capitalists are the people who’d fund your start-up’s operating losses – They fund your operating losses so that you both can make more money.

In other words, if your business is growing and you have real financial evidences to prove that you can sell more if you get more money to produce more or market more, VCs will be happy to fund your ecommerce business. They will give you all the money you need to meet the additional expenses you need to market more, produce more and sell more to achieve a higher growth rate..all for mutual benefit.

4) How is VC funding different from a bank loan?
In many obvious ways, for example – unlike VCs, banks will not fund your losses without security. And they mostly give secured loans. The reason is simple – banks can’t take as much risk as a venture capitalist, and since VCs take more risk, they look for a more exponential financial return than a bank.

5) When is the right time to go to a VC?
The right time to go to a VC is when you have built a business with money that’s not VC money (self funding, small personal loan, angel investment, etc) and you’ve started to see some traction. Before you go to a VC, your business should already be synchronized with the market. You have to be able to prove that there is market demand for your products out there. VCs are most likely to fund your business if you can show them signs of growth. So, if you have a business and it’s losing money because it’s growing, it’s best time to go to a VC.

6) Is VC funding the only way to raise money for my ecommerce start-up?
Of course not. I added this question because often I see many start-up owners talking like VC funding is the only way they have to raise money. They think VC money is all they want to grow.

Today, there are so many other options for you to raise money for your start-up and often VC funding isn’t the first funding source for most start ups out there. If you’re a start-up and need funds to build a minimum viable business, you should look to start with (preferably, in the same order):

  1. Your own money
  2. Then money from friends & family
  3. Then may be crowd funding
  4. Then angel money
  5. Then you can take the big leap and raise VC money

That’s why often we often see that by the time an ecommerce company is doing their first VC round, they already have raised couple of million dollars in funding.

7) Can I raise VC money just with a power point presentation before building or testing a business idea?
I am not saying you can’t raise VC money if you’re a fresh start-up. You can but then you need lot of luck and a revolutionary product or business idea. Even today, there are VCs who’d fund an idea from scratch.

The thing about VCs today is that every VC has a different criteria. All VCs don’t think alike or follow same investment rules. They all have different risk appetite and different investment objectives & motivation.  For example, while one VC can reject your business idea all together, another VC will not only listen to your idea, but might offer you a fraction of money you want to raise and give you 3 months to see what you do with that money. And then if they like what they see after 3 months, they will decide whether or not they want to invest money in your business.

8) How to raise VC money?
Raising money is often more complicated process than what we read on Mashable & Techcrunch. There are many things that happen behind the curtains which companies don’t reveal in their press release.

However, to make things less complicated for your start-up, you can follow the following steps to raise VC funding for your ecommerce business:

  1. Start with your business from primary sources (self funding, friends & family, angel etc)
  2. Use that money to build a small successful business and establish the future profitability of business.  
  3. Network with people who know VCs. If you don’t know someone who knows VCs, go to conferences where many VCs hang out and look for opportunities to invest. You can also go to trade shows and setup your booth. Who knows, a VC investor might walk to you on his own and offer you money to help you take your business to the next level :)

Agree, disagree? Have more tips to share about Ecommerce VC funding. Feel free to share in the comment section below.

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