IRCE speakers walk small merchants through the funding process.
Thad Rueter , Senior Editor
Angels exist all around us—in fact, the best ones might live in the same city you do.
That’s not some mush copped from “It’s a Wonderful Life.” Rather, it describes part of the cold reality faced by small e-retailers who need investment cash to fund their ventures. Tips for attracting that cash—and a view of the odds against getting that far—made up a session this week at the Internet Retailer Conference & Exhibition 2013 in Chicago entitled “A date with an angel—Finding funding for your early-stage retail business.”
Angel investors are wealthy investors with the stomach to put their money into startup companies. They might have a taste for risk, but are anything but pushovers, warned Tyler Spalding, co-founder and CEO of StyleSeek.com, where consumers can shop for men’s apparel and shoes from other retailers and find fashion and lifestyle tips. The company, which launched in 2011, has raised some $1 million in capital. “It’s just really, really hard,” he said. “Only a few percentage of startups in e-commerce can get there. You just can’t take [rejection] personally.”
And that rejection will come, along with a certain level of fierce tedium. Spalding estimated that raising his company's capital required no less than 75 meetings and 1,000 e-mails, plus countless repetitions of different pitches—the elevator one and the 10-minute type. Even success brings a price—exactly how much depends on how big of a piece of the company the investor will demand, and how far the retailer will bend. “It’s like your soul being ripped out,” he said. “You are giving away part of your company.”
Spalding and co-presenter George Deeb, managing partner at Red Rocket Venture Consulting & Capital—Deeb offered advice from the investment side—gave guidelines about what to expect about angel investors, and how to go about seeking capital. They included:
• Realize that e-commerce can be more challenging than other industries for many investors. Inventory can go out of date, for instance, and customer acquisition can be expensive. Still, Deeb said small e-retailers can be thankful they don’t typically operate physical stores—that adds significant real estate costs, another reason for investors to say nyet.
• Have a master’s knowledge of your market. If you are not, in Deebs words, “a first mover,” figure out what you can do to embarrass competitors with your balance sheet. For e-retail, it will be unlikely that any startup is moving into virgin territory, which means the investment proposition could come down to showing how you will build “a better mouse trap.”
• Figure how out easily your business can scale. For instance, handling most of your customer service online instead of hiring employees to man phones will shrink overhead and could help fuel a growth spurt—a way to get an investor to tilt toward yes.
• When imagining the future of your business—that is, the ceiling for revenue, market share or customer acquisition—do not assume a virtually unlimited marketing budget. It just won’t happen.
• Embrace the potential and power of higher margins. “Those are better,” Deeb said.
• Don’t approach investors too early—that is, before there “is a road map toward profitability in a reasonable amount of time,” Deeb said.
• Investors generally want 10 times their investment in return, and within five years.
As for where to look for capital, Spalding suggested such places as personal assets, friends and family (though he cautioned about borrowing from people you know), vendors (they might trade services for a stake in the company), tax credits and small business loans.
When a small e-retailer is ready to hit up an angel for cash, Spalding advised a small approach, at least at first. “Shop locally when you can,” he said. “Get references from lawyers” and similar contacts. Doing so could increase the chances that the angel comes bearing not only money, but the advice and wisdom of a mentor—another asset for most any startup.