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Raising funding for your DTC Ecommerce brand in a challenging environment (2022)

As Europe teeters towards a recession and customers tighten their belts, Ecommerce brands face hard times. The challenge to turn one-time customers into repeat customers grows bigger, while the means to do so shrink. CAC, iOS changes and supply chain nightmares are just a few of the problems brands are battling with on the quest to become profitable - an essential metric to secure Ecommerce investment.

In this piece, we’re unpacking the various ways brands can raise funding for Ecommerce, investigating what today’s investors are looking for and showcasing DTC brands who’ve been there, done it and got the t-shirt.

The pros and cons of Angel vs. VC seed funding

When applying for Ecommerce start-up funding, most brands turn to angel investors or VC seed investors. Angel investors are individuals who invest money themselves whereas VC investors tend to be large companies investing on behalf of customers. 

Although both options provide funding for Ecommerce, there are several differences between the two options. We’ve distilled these differences into two simple tables, because life’s confusing enough.

Angel Investment - pros and cons

Angel Investment pros and cons

VC seed funding - pros and cons

VC seed funding pros and cons

In a nutshell, angel investments are better suited to the earlier stages of a start-up (the idea stage for instance) whereas VCs will be looking for evidence of business progression and growth, but often have more cash to play with. Angel investors are willing to invest in riskier businesses - they’re usually business owners who have been there and done it themselves. VCs on the other hand are investing other people’s money into your business, so it needs to be watertight. 

The best funding endeavor to choose really depends on your business, and all investors will differ slightly so it’s critical to do your research before jumping into an application.

How to become more attractive to investors

Whichever investment route you pursue, it’s important to note that we’re going through some of the most competitive times in DTC history. In the US alone, it’s predicted that there are over 120,000 DTC brands and DTC makes up 13% of all Ecommerce businesses

With this in mind, we spoke to Angel investor, Nick Telson to find out how Ecommerce brands can become more attractive to Angel investors.

What are you looking to invest in when it comes to DTC brands?

"I’m looking for something very unique within the market. I’m really interested in the brand and how they differentiate themselves in the market, as DTC is the most copied vertical out there with lots of versions of the same product. it could be a niche, but has to be one their audience is passionate about."

Nick Telson, Investor

When would you be looking to invest?

I tend to invest early, pre-seed evaluation. It’s tough to show lots of traction at this stage but retention rates is a key metric I’d look at. Some questions I’d have around this are:

  • Is there enough repeat purchase? There has to be a point where you stop burning cash just to constantly sign-up new users. 
  • Do the founders have the skills to market the brand or grow it, or do we need to get that talent in? 
  • Do the cogs of the product make sense? Sounds obvious but do the math of delivery, returns etc add up? CAC vs LTV, basically. 
  • Do they have the buzz to go with the press? It’s all well and good being featured in newspapers, but if you don’t have the sales number to go with that buzz, alarm bells start to ring.

What are the red flags? 

Low repeat purchase, very big competitor set and no differentiation, lack of experience in Ecom or growth marketing. The aforementioned press but no sales. These are all the components.”

What advice would you give to DTC brands looking to secure investment in the next two years?

Now more than ever, show that traction and buying intent. If you don’t have a product yet, can you launch a community or have an early-access list? All of this will give the investor confidence. 

If you haven’t got Ecommerce experience, find a co-founder who does or show that you’ve already got the team in mind for the important hires. 

Retention - if you are selling, this is one of the key benchmarks that you can hold your customers and they’re sticking. That’s going to be key - you’ve built a loyal base, you’ve been smart about how you’ve activated loyalty. Also, are those customers sharing your brand and social selling for you because they love your brand?

Those are all really good markers that the brand is on the way to something special. Finally, i’d want to know: is there supplement products you can sell to increase the checkout spend, and is there consistent, steady growth?

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Alternative funding options

Start-up life moves at the speed of light and sometimes you don’t have months to spare creating the perfect funding application to generate cash flow. In this scenario, there are a number of alternative funding options available on the market. We approached Pipe and Juni to tell us more.

Pipe - fast flexible finance

What is Pipe?

Pipe enables companies with predictable recurring revenue, like DTC subscriptions, to trade that revenue for up-front capital. Whether you’re looking to hire, invest in marketing, or take advantage of a time-sensitive inventory opportunity, you can get the cash you need quickly without taking on a restrictive loan or giving up equity. DTC brands like MUD\WTR and Verma Farms use Pipe to finance marketing, operations, and even acquisition opportunities.

What’s the Pipe application process?

The beauty of a platform like Pipe is the speed and flexibility. Rather than spending weeks or even months on a debt or equity raise—complete with pages and pages of applications and pitch decks—Pipe relies on live integrations. First, you sign up for a Pipe account, which takes just a few seconds, then connect your billing, banking, and accounting software. The onboarding process can take less than five minutes, and businesses can get access to a trading limit (up-front capital) and a bid price (think cost of capital) often within 24 hours.

What can brands do to ensure they are successful?

For DTC subscription businesses, timing is everything. The gap between inventory and marketing costs and bringing in the revenue can be the biggest hurdle. That can leave you scrambling for capital to fill the gap, or worse, offering steep discounts for up-front annual payment. By leveraging your recurring revenue, you can close that gap and invest in your own growth to scale faster. 

“Recurring revenue financing is such a powerful tool for DTC, because you don’t have to hurt your margins by offering discounts, take your attention away from the business to fundraise, or lose the advantages of moving quickly. You can stay nimble and focused, which is really what DTC is all about.”

Harry Hurst, Co-Founder and Co-CEO

Finally - is there a catch?

Pipe charges a 1% trading fee to both sides of the platform. Institutional investors then bid on recurring revenue streams based on what they are willing to pay. Typically, we see bids between 93 and 97 cents on the dollar, compared to the 15-30% discounts companies often give their customers for up-front annual payment. 

Juni - online advertising credit card

How can Juni help DTC brands financially?

Juni is specifically built for ecommerce. Juni provides a full-suite of financial tools such as multi-currency bank accounts, debit cards with cashback, interest-free credit lines, virtual cards, insights and great features like auto-retrieving Google ads receipts and automatically syncing with Xero.

"If you’re looking to grow your business through ad spend on Google, Facebook, TikTok and others then you can supercharge your spend with Juni’s flexible credit lines." 

Tom Lovelace, Commercial Lead

What’s the process for applying?

You can sign up via the Juni website. You’ll need to go through our KYB processes where you can submit a few documents to verify your identity so we can make sure we’re compliant with regulations and you can then connect your financial accounts and apply for credit. Instead of using outdated filed accounts, Juni underwrite based on open banking data so customers connect their financial accounts to the platform which gives read-only access to their finances for fast, accurate decisions on how much we can lend.

Is there a catch?

No. You can get up to 1% cashback on all your spend, you get great insights into your business, low FX rates, save time on admin and it’s completely free to use. There are no fees for using the Juni platform and the credit is interest free.

What can brands do to ensure they are successful?

Connect all their financial accounts, from banks to credit cards to payment processors, so Juni have a full overview of their business. If we can only see one account, we may offer lower credit limits because we can’t see a whole other section of the business. It’s also helpful to let us know of any non-financial information that might affect eligibility, like a pending funding round.

DTC funding success stories - HUX

When considering Ecommerce business funding, it makes sense to take a leaf out of the book of brands who have been there and done it. HUX Health is a DTC brand offering superfoods and hydration products, without the nonsense. 

The UK-based start-up recently secured a £1M funding round. We caught up with Founder, Damien Hyrne of HUX to find out how they did it.

What is the mission of HUX? 

"Our mission is to inspire everyone to find their daily edge by making complex nutrition simple. Wellness should be about positive, effective rituals, not rules. We have created science-backed clinically proven supplements for essential nutrition, brain health, recovery and sleep; and a brand to place proudly on the kitchen bench, not hidden away in the cupboard."

Damien Byrne, Founder

1M funding is such an achievement - well done! What do you put your success down to? 

A team with a diverse set of complimentary, road-tested experiences. Our investors have also been able to see the clear white space we do - for highly effective, trusted, beautiful health supplements.

 

How much value do you think investors put on healthy profit margins and repeat revenue? 

Healthy profit margins are much less relevant than repeat revenue potential. It does help though that we have a high value, dense product range that allows for a clear pathway to profitability.

 

Did you face any challenges on the funding journey? 

Timing has been the largest challenge.... The last eight months have been materially harder to raise money than the prior few years - for all the known and obvious reasons of global uncertainty due to the war and high levels of inflation.

 

Finally, what’s your advice to other DTCs looking to secure investment? 

Investment is in people first, idea or product second. Purely digital acquisition costs are very expensive at the moment, so think more broadly about how you would complement this.

DTC cautionary tale - Motley

Motley Jewellery's closing statement

Not all businesses reach the golden echelons of growth, in fact 60% of new businesses fail within the first 3 years. DTC brands are not immune to this sobering stat. Motley launched in 2017 on a mission to disrupt the jewellery industry with affordable, designer-made gems but sadly closed its doors in May.

Despite building an amazing brand, co-founder Cecily Motley commented “​​What I didn’t know then [5 years ago] was how small the “good idea” slice is in the pie graph of success. Brilliant brand and operational prowess will only get you so far; cash, luck, category growth and timing must be right to propel you to the unicorn sphere.”

Ilana Lever, Motley’s other co-founder, cited the difficult iOS privacy updates of last year as a catalyst for the brand's economic downturn. “The financials only made sense at scale, and iOS 14 knocked those aspirations for scale on the head. We hadn’t realised the influence of Facebook on our business. As Facebook lost its effectiveness, our unit economics crumbled.”

Conclusion

As we hurtle towards the toughest economic challenges since 2011, only those with the most sustainable growth strategies will survive. At Relo, we believe driving more recurring revenue from your existing customers is the best way to futureproof your business. 

Find out how we’re helping the world’s best DTC brands get their customers to buy again, try a subscription and stay on subscription.

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