So, you were an online marketer or digital enthusiast. On a whim, you set up an online shop and started selling goods on third-party marketplaces such as Amazon and eBay. When business picked up, you set up your own website and started building your eCommerce brand. Today things are still better, and you have two people working full-time in your e-commerce business. If only you had e-commerce investors backing you, business would have been much better. But how does one go down that path? That's a difficult question to answer, especially if you have never raised investor's money before.
You have traveled quite a great distance along the e-commerce journey – probably much further ahead than you ever thought you would. But today, you are facing disenchantment. Not because of what has been, but because of what could have been!
You read stories about the billions that some e-commerce startup founders are making, but you haven't yet made your millions. At this stage, you have learned the ropes of the business, but are limited by capital. If only you could rope in an investor, the two of you could ride the e-commerce wave and make your billions.
A Common Story
While on the one hand, the above story might seem like the tale of a specific e-commerce businessperson, it is actually the tale of thousands. Over the past few years, we have come across many businesspeople that have set up fledgling e-commerce businesses and are feeling the pains of undercapitalization.
You need to get money. Other than receiving charity, there are only two sources of money: (i) from investors, (ii) from customers. There are many, such as my good friend Dr. John Mullins, a professor at London Business School, who recommend the latter. But often it is not possible to raise enough revenues or advances from customers to scale up your business fast enough. In such situations, you have to consider divesting part of the ownership of your business to investors.
If there were some kind of a guarantee of making a substantial return on investment, no one would bother about due diligence, leave alone "incisive" due diligence. But since there are no guarantees, investors will evaluate you on various parameters to figure out the likelihood that your business will provide high returns to their investment.
If you get inside the mind of an e-commerce investor, you will find that each one has her / his own investment thesis and philosophy. But there are a couple of issues that all e-commerce investors seem to want. Here are the top five:
- Is Your Business Differentiated? It is tough to differentiate an e-commerce business. Right from technology and products to marketing and branding, most e-commerce businesses seem to be cookie-cutter replicas. So, what are you doing to stand out?
- Potential for Immediate Vertical Growth? Not all stages in a company's lifecycle are suitable for investors. Investors prefer to come in at a point where some infusion of capital will result in a significant uptrend in sales and other metrics. Are you at that point in your lifecycle?
- Unique Advantages? Is there any unique competitive advantage that your business possesses that will defend it in the marketplace?
- Potential. The worst case for an investor is when the investee business is doing well, but investors are still unable to exit! Can you show a path, not necessarily a precise step-by-step, to exit?
- The Founding Team? All said and done, investors invest in great people. Is that you?
Investors have made, as well as lost, a lot of money in e-commerce investments. Except at the very beginning, the buzz in investment circles has been somewhat negative for e-commerce startups. Despite the lack of enthusiasm, e-commerce businesses of all sizes have steadily attracted investments. I hope yours will too. Keep the issues raised by this article in mind, and you should be on your path to raising investments.