How to fund your DTC startup?
The ‘Direct-to-consumer’ darlings, Warby Parker, Casper, Daniel Wellington, Glossier, Bonobos, Allbirds and Everlane have all achieved over $100mn in revenue within five years of their launch. If you’re a DTC brand operating in India, I’m sure you would be looking up to one or more of them. What I find interesting are the diverse paths these companies have taken to fund their businesses.
All of these brands are incredibly successful and the founders have demonstrated that there are different paths to get to the same outcome. Having said that, as an early stage VC in India, this is my perspective on how brands could navigate the venture ecosystem in India.
I see two broad funding milestones — “Seed” which is the capital to jumpstart your brand and “Growth” to help your company grow beyond Rs.100 cr.
Seed Capital
Seed capital would primarily help the company in 1) Bridging working capital gaps 2) Test out different marketing channels 3) R&D for expanding the product portfolio
When to hit the VCs?
- Once the first product has got a product-market-fit; basically, great customer love :)
- You have beginnings of a plan to expand this market — either by increasing your customer base from a niche to a larger audience or by expanding your product portfolio to serve your niche better
- I personally love, good design — while yes, a great website, good social presence, product packaging, etc. are important. But, it’s all unfortunately quite meaningless, if your customers don’t connect with the product and don’t start talking about it to their peers
- These are some specific metrics that we look for — Growing at over 20% MoM, Signs of high referral/word of mouth, High Return-on-advertising spend of over 4x and a scale of at least INR 15 lakhs/month
- Typical dilution at this stage could range from 15% to 25% for a sub $1mn raise
Most D2C brands, given their structure, should require lesser working capital as compared to a traditional brand. Having said that, this of course would differ a lot from category-to-category. But whatever be the requirement, venture capital is really expensive and therefore for working capital requirements, a brand should ideally try to get capital from NBFCs/Banks. Depending upon the company’s capital efficiency and the size of the seed round, between seed and growth stage, the company could require smaller ‘bridge’ rounds. This could come from VCs or Venture Debt firms or through Working capital financing.
Growth Capital
This would primarily help you expand from being a sub Rs.100 cr annual revenue brand to possibly over Rs.1000 cr.
Where growth capital could help?
- Expanding distribution channels: Going offline/experience stores — while most D2C brands start online, going offline could help the brand reach a larger customer base
- If your brand already has great distribution, growth capital could enable you to afford ATL mass advertising to capture the market
- Going International
- Typical Raise would be over $4mn and dilution could range between 25% to 35%
There are too many tailwinds for the DTC segment in India — 1) Infrastructure is in place, 2) People are much more open to trying out new brands and 3) Thanks to FB & Google, marketing has become easier as well. Therefore irrespective of the funding path you choose to build your business, if you have a product that customers love, you can definitely create a valuable business in the next 5–10 years!
You can read more about our fund, here.
