Whether meal-prep service, sustainable fashion line or organic supplement brand – direct-to-consumer (D2C) companies have started to claim a sizeable slice of the market. Fast, nimble and efficient, they cut out unnecessary middlemen and delight customers with a flexible, targeted offer that meets their needs – at a competitive price.
At the same time, D2Cs often require economies of scale to make their model truly work – and scaling up fast means raising funds. So, what’s the best way for these start-ups and budding market leaders to get the required cash injection?
Read on for a quick overview of the 5 most common ways for D2C businesses to get funding – (obvious pros and cons included).
1. Getting in early – angel investors
Got a bright idea and just starting out? So-called angel investors help early-stage startups get off the ground via personal investments. Based on years in the sector or industry, these cash-rich individuals can also provide valuable support through key contacts and experience. In return, they will expect a sizable share in your business (ownership equity) or convertible debt. What’s more, you will probably need to attract quite a few different “angels”, since most of them prefer to spread the risk at this pre-market validation stage, thus requiring more coordination and communication between all stakeholders.
2. Staking a claim – venture capital
Venture capital (VC) continues to be one of the most popular ways to grow a start-up. Fuelled by contributions from businesses and individuals looking to invest in prospects with high-growth potential, such funds specialise in identifying both investors and attractive investment opportunities.
In this crowded field, it can take time, excellent contacts, several rounds of business plan presentations and a little bit of luck to attract suitable venture capital. What’s more, since VCs only expect about 2-3 in 20 of their investments to succeed, they will also expect a relatively large slice of the company – as well as extremely swift growth and a fast path to profitability – from the ones that make it.
According to Eric Paley from TechCrunch, finding the right investor can make or break your project: “VC should be a catalyst for growing companies, but, more commonly, it’s a toxic substance that destroys them. VC often compels companies to prematurely scale, which is typically a death sentence for start-ups.”
So, it is definitely worth considering whether you are willing to give up this much equity in your own company at this stage – and whether you are willing to deal with the potential pressure and interference from a VC fund.
3. Grassroots support – crowdfunding
Don’t want to dilute your equity or rely on professional investors who might wish to meddle? Building your business from the ground up can also involve crowdfunding, one of the most “democratic” ways to fund a particular service, scheme or product.
Over the past decade or so, platforms like Indiegogo and KickStarter have helped people fund anything from products and prototypes to indie films and charitable causes. The basic idea? Supporters back your stated goal through individual micro-contributions tied to a timeline and funding threshold. They, in turn, can look forward to tiered rewards like a share in your company, early access to services, discounted products, personal thank you’s or custom merchandise, depending on their contribution.
For “buzz-worthy” products or services, crowdfunding can be a surprisingly effective and highly visible way to fund a specific goal or measure. Yet it requires a lot of PR and marketing effort and expertise to kickstart a successful crowdfunding campaign – and there is certainly no guarantee of success. Many crowdfunding campaigns never get real traction and fizzle out before the big pay day. Not to forget: potential supporters will only fund something they can get excited about. There’s a good chance that your planned ad spend, social media team expansion or regional expansion does not hit that particular mark.
4. Banking on solid business – bank loans
Traditionally, banks were the first point of call for entrepreneurs seeking to grow their business or bridge a short-term cash flow gap. Yet banks have become more risk-averse – and often lack the necessary understanding to correctly assess and underwrite tech businesses. Since 95 % of all start-ups looking for funding are pre-profitable, they don’t meet most bank’s existing lending criteria.
If you do decide to go down this road, be prepared for a relatively long approval process and the need for a personal guarantee or collateral to back up the loan. Not to forget frequent interference from the bank throughout the repayment period. In short: while bank loans may be an option worth exploring, they often come with outdated, 20th century terms and procedures that might not work for an agile, progressive D2C business looking to capture an opportunity.