How to Raise Capital for an Ecommerce Startup What are Venture Capital funds ? When you start a business, you usually make no revenue at all while you always need cash to pay your first employees (and yourself as well..). You may also have to invest in building your product or in marketing in order to get known from your customers. It means you need capital. It is the same when your company is bigger but not profitable because it has not yet reached its critical size. What Venture capital firms do for entrepreneurs is providing this capital to support startups from their creation to their profitability. They invest in the company and get shares. They take the same risks as the founders. It means that if the company fails they lose all their money and they only win if the company succeeds. What are the different types of Venture Capitals? They are different kind of VCs depending on which stage they invest. It can be seed stage or early stage, with pre-revenue startups which need money to finance product development or to hire the first employees or to finance the first marketing campaigns. And there are also VCs that are interested in startups at a later stage when the company has already some revenues but still needs to grow in order to reach profitability. In that case, the company has a proven business model but needs to scale. And to scale, the startup will have to structure its organization which usually implies to hire middle management and then to invest massively in marketing in order to grow its business as fast as possible. It costs a lot. It’s quite complex. This is typically where VCs can help entrepreneurs not only with funding but also with their experience, their expertise in scaling up a company at a very fast pace. Which funds for an e-merchant ? An ecommerce startup can contact Tech oriented VC funds and especially those who are focused on web. Entrepreneurs should look for VCs not only for the funding but also to get support. Indeed, VCs provide feedbacks, they challenge the CEO and the strategy of the company on very diverse questions like for instance positioning, pricing, or user experience. As they have a very broad view on the e-commerce industry, they usually know what the right metrics to follow are and where the company should go to reach profitability: it can be gross margin, conversion rate, or maybe customer acquisition costs. Some VC firms can really help the entrepreneurs to grow their business. That’s why entrepreneurs should really take care of choosing the right VC for their startup. Keep in mind that your relationship with your VC will last a very very long time. There must be a mutual human fit between you and your VC as persons, as well as a good fit between your business and the VC firm expertise. It’s a relationship, it’s build on trust and respect, you’ll need to be able to rely on him from day one until the exit. And as e-commerce is generally a very competitive market, you’ll need to get a VC firm able to help you to move faster and smarter than any one of your competitors and also to help you to avoid mistakes and deadlocks. When should I think about raising money from VCs ? Today, thanks to e-commerce platforms like Prestashop it is quite cheap to start an online shop with very few capital and to make money from day one. The e-merchant may then improve progressively its e-shop and then get funding from Business Angels. As VCs we commonly consider this is the best stage to measure the entrepreneur true capacity of execution. We see there outstanding people making incredible things with very few money. Bootstraping its company is a good way for the entrepreneur to demonstrate its ability to execute and to prove its model. It will be easier for him to convince VCs as he has figures to show, as its company has already some customers or revenue and as his business is growing. What is the best way to contact VCs? There are 3 ways to contact a VC: – The simplest one is to use the contact address on the website of the VC firm. – Another way to contact a VC is using a placement agent. It will provide you two benefits : the first one is that he will help you to make your startup looks more appealing for VCs and the second one is that he’ll help you to target the most pertinent funds regarding what you do and how mature your company is. – And finally there is a third way which is mutual relationship and it is probably the best way to use, provided you know some people who know the targeted VCs. It is the most efficient way to proceed. What are the selection criteria? The VC investment process is by construction a very selective process. For instance, at Serena Capital we receive one thousand investment proposals every year on which we usually make 4 to 6 investments. The selection criteria depends on the stage of the company and on the investment strategy of the fund, but the VCs usually expect several things. – First that the startup product or service corresponds to a true and real need from a big market – Then that the company has already been able to convince its first customers and that the business model is proven or is about to be proven and that it is a scalable a business. – And finally, the VC will also ask if the company already has some of its KPIs that demonstrate some kind of traction amongst its customers. When your business deals specifically with ecommerce, the VC will certainly have a very close look at metrics like your customer acquisition cost, your repeat and conversion rate, your gross margin and your contributive margin. How to present my company ? During the first pitch, the entrepreneurs need to be able to explain very simply what they do. – Their slideshow needs to include (at least) something about the team, the product or service provided by the company, its barrier to entry and competitive advantage. – They need also to talk about their market (how big it is, who are the competitors and what is the competition dynamics). – And, at last, they should talk about their business model, the growth strategy and also about what they will do with the funding. Remember that it is an introduction to your company. It’s just here to arouse curiosity and interest from the VCs. So don’t make it too complex or too long. A short and simple presentation can really do the work very well.