If you’re a direct-to-consumer startup struggling to elevate your brand to the next level and land a venture-capital windfall, you’d be forgiven for thinking that brands like Allbirds, Stitch Fix and Warby Parker have tainted the conversation around what it means to achieve success in 2019’s “consumer is king” world.
Outlier extraordinaire, Allbirds managed to become an “insanely successful story,” said Grailed co-founder and CEO Arun Gupta, and ascend into the echelon of fellow unicorns boasting valuations north of the coveted billion-dollar benchmark.
Many, if not most, startups never gain membership into the unicorn club—and that’s perfectly okay. Rather than aspiring to be the exception versus the rule, budding businesses would be wise to focus on the bigger picture and higher priority: financing their fledging companies in a way that works.
Gupta was joined by Faherty Brand co-founder Alex Faherty and Ellie Wheeler, a partner at venture capital firm Greycroft, at The Lead Innovation Summit 2019 last month, to debate the ways and means of connecting startups with the dollars they need to gain momentum. Having worked in private equity prior to founding the eponymous beach-lifestyle apparel brand with his twin brother Mike, Faherty admitted that his background “changed the way I felt about raising money.”
Where many startups are content to remain digital-only in their early days, Faherty was cognizant of the limitations of being an exclusively web-based brand when he and his brother, a former senior designer for Ralph Lauren, birthed the company back in 2013. “We used and leveraged every single sales channel, because in the beginning we couldn’t go and raise a bunch of money and say ‘we’re going to be 100 percent online.’ Because no one would fund a clothing brand based on what I just said,” he explained, stressing the brand’s “scrappy” beginnings.
Instead, Faherty decided to hit up 54 faithful family members and friends in a seed round—“all my brothers and sisters had to pay like $100,” he said—coupled with his own savings. However, after one person eventually came on board as a strategic investor, “it was impossible to get money from anyone after that,” Faherty added.
Pressed to address the needs essential to any emerging brand, Faherty said the company’s priority was to secure working capital, as well as “production on a bigger level” that could deliver mass-quantity goods without giving customers sticker shock.
“So then we basically raised as much debt as possible,” he said. The company kept its infrastructure and overhead low and began wholesale operations in addition to managing a retail store, e-commerce and a mobile site.
When wholesale found its legs, Faherty said they turned to traditional factors for financing. Nordstrom is one of the company’s strongest partners in the wholesale channel, which makes up about 30 percent to 40 percent of the brand’s business.
Today, Faherty said, the company has “a really good ABL [asset-based loan]” financed against its physical goods. “To make our company successful, we just need enough money to get through the initial stage,” he explained. “And then once you get over about $25 million in revenue, people will want to invest in you.”
At Grailed, Gupta agreed that fundraising in the early days was an uphill battle. Investors weren’t interested in a site that sold men’s clothing—even if it’s a marketplace platform that carries no inventory but allows peers to buy and sell streetwear, hot sneakers and luxury fashion directly.
“We’re very much a technology company,” he explained. “At the beginning the reaction we got was ‘men’s clothing seems niche.’”
Gupta knows Grailed was fortunate to operate free of working capital constraints like struggling to fund R&D and manufacturing. Only after the startup was bringing in $5 million to $10 million in sales did it secure any outside investment. “I think even at that point no one really wanted to invest in us,” he added, “but we got lucky.”
When it comes to raising money, it pays to be creative, Gupta and Wheeler agreed. “Be willing to keep your mind open to different sources, whether that’s doing wholesale a little bit earlier, or private label to actually make enough money to subsidize your online,” Wheeler said, noting that venture debt is an expensive fundraising option that only applies to startups operating with equity.
Entrepreneurs, Gupta added, are lulled into thinking “that raising capital is going to make everything so much easier.”
And even in our hyper-modern world, Gupta thinks some answers may lie in the past. “How do you figure out how to make your business work the way people did 20 years ago?” he said.
Consumers today have more resources at their disposal than they did a decade ago, and even manufacturers might have some money lying around just waiting for an opportunity, Gupta said.
“Maybe they’re willing to front, you know, the first 50,000 units for you because they think you’ll get to 500,000 units in like a year,” he offered.
Creativity could spell the difference between slogging through several more funding rounds versus growing a company more slowly, but without as many obligations to outsiders. “Fundraising at a big numbers also is fundamentally resetting the expectation of what success is,” Wheeler said, warning of the dark side of the startup world. “Success is now far up into the future at a much higher price.”
As The Notorious B.I.G. once said in his classic ‘90s hit “Mo’ Money, Mo Problems,” “the more money we come across, the more problems we see”—and Wheeler couldn’t agree more when it comes to startups taking ungodly sums of venture capital. “Sometimes that closes down opportunities to sell the business for what would have been a great outcome,” not just for the founders but for the whole team, she added. “It’s not just about the TechCrunch headline.”
Gupta shared his mixed feelings on incubators and accelerator programs. These opportunities certainly have their merits—and have propelled many a startup up to sustained success—but the co-founder warns of their “huge potential downside.” Opting to join one of these offerings, he said, can “distract” fledging companies into “thinking they’re going somewhere.”
Nothing is more important in the beginning stages of the startup journey, he explained, than focus. And so if an incubator isn’t helping entrepreneurs get better at some area of their business, it could be doing more harm than good—or at least not generating a reasonable return on investment.
And though Faherty Brand was omnichannel from the start, its co-founder recognizes the hurdles DTC startups facing when considering the evolution from clicks to bricks.
“There is a really big learning curve going digital to offline [that] prevents a lot of brands from doing that,” he explained. Newer businesses, like b8ta, Bulletin and Leap, are doing their best to make DTC’s IRL expansion as painless as possible.
Faherty Brand might have been successful in carving out a business that continues to hum along but its co-founder cautions those dreaming of a similar outcome. “No one wants to fund an apparel brand,” Faherty said.