Fundraising for Ecommerce Businesses
When Should You Raise Money for Your Ecommerce Business?
Regardless of the industry, capital (money) is an important raw material for survival and growth. Ecommerce is no different. However, the role of capital in different industries is different, and its time-sensitivity varies too. Therefore, it is a great idea to plan ahead and be ready to raise capital when the time arises.
When Should You Raise Capital, and How Much?
You already know that I am going to respond to that question with a "there is no correct answer." However, I will not stop at that.
When evaluating the timing and quantum of fundraising, there are two primary schools of thought:
- Raise as much as possible, as soon as possible.
- Raise as little as possible, as late as possible.
Today, though the startup ecosystem does more of the former, there is merit to both approaches.
Raise as Much Investor Capital as Possible, as Soon as Possible
The basic premise here is that you do not want to wait for sales. At least in the initial stages of any venture, the more you spend the more you grow. As a result, you should try and maximize the amount of money you raise from investors, and do it quickly. On the downside, this approach will lead you to grow profitlessly, as you will be dependent on investor's dollars and not the customer's.
Raise as Little Investor Capital as Possible, as Late as Possible
A strong business is one that has healthy revenues, which may take some time to come by. If you raise only a small amount of money, you end up diluting your ownership just a bit.
When the good times roll in, you have the lion's share of the spoils. And by postponing fundraising, you raise the value you receive from the sale of each percentage of ownership in your company.
Which Approach Makes More Sense for Ecommerce Businesses?
Though ecommerce businesses share several characteristics with other businesses, there are some noteworthy differences.
If you have followed my writing, you know that I have shouted myself hoarse about the need for ecommerce businesses to turn profitable. However, until that happens, ecommerce businesses will grow on investor dollars. That leads me to my obvious conclusion: when it comes to ecommerce businesses, you should raise as much money as possible, as soon as possible.
Though Investor Dollars Make Sense, They Come With Their Own Set of Problems
Being dependent on a small set of investors to keep you afloat is fraught with risk. You may not be at fault, and the industry characteristics may not change either, but owing to internal pressures, your investors may ditch you. One could say the same about customers too, but customers are far greater in number. As a result, a few customers abandoning you will not cause your ship to sink. On the other hand, your dependence on investors is going to be far more critical.
The Risk Is Not Just About Investors Abandoning You
There is a lot that can go wrong in your relationship with investors. There might be a change in the investor's top management that affects the relationship adversely. If the investor is a fund, it might be reaching the end of its lifecycle.
That might compel it to exit its position in you at all costs. Then again, the investors' outlook about your enterprise might cause them to believe that they would be better off by pressuring you to merge with another portfolio company... the list is endless.
All relationships are fraught with risk. So just because we can point out pitfalls does not mean that you should not raise investor dollars. In this regard, I would like to quote Alfred Lord Tennyson: "'Tis better to have loved and lost than never to have loved at all."
You get the idea, right?