Over the past couple of years, the direct-to-consumer (DTC) model has gained a lot of popularity. Not only has it disrupted the retail industry, but has also revolutionized the way that brands operate.
An increasing number of companies have started embracing this business model. Although these brands mostly include small-scale businesses (most of them making under $1 billion in annual sales), their potential is far-reaching.
Footwear, mattresses, men’s grooming, beauty and automobile industries are all shifting towards this business model as a means of reaching their customers and establishing relationships directly.
One of the primary challenges that a lot of small businesses face when establishing their own consumer-product brand is funding. Unlike other e-commerce models, DTC brands usually have to invest in inventory long before selling it. That makes cash flow really tight.
Other costs in different areas of the business like research and development (R&D), manufacturing, and branding drive the required capital even higher.
There are, however, certain ways DTC brands can finance their inventory without much hassle. Let’s take a look at a few of them.
Venture capital is the most obvious choice for funding a relatively new, small-scale DTC brand. There are a few reasons for this.
While bank loans might be sufficient as operational capital, bigger funding injections allow brands to scale freely, develop more or better products, increase production, etc. Plus, they usually help with expertise.
There are several investors funds that can work with DTC brands and can provide the basic funds for growing your brand.
For example, there is the Forerunner Ventures that offer capital of nearly $360 million to DTC brands. They are specifically interested in B2B commerce, SaaS and innovative brands and have DTC household names like Glossier, Away and Birchbox under their belt, which is impressive to say the least. The primary focus of the funding is to enable new brands to finance inventory and influence consumer trends in newer ways. The funding provided is more than sufficient to cover operational costs as well as those of inventory production and marketing.
Other venture capital providers include names like Samaipata, Collaborative Fund and Obvious Ventures – all of which provide varying amounts of investment to DTC brands and help establish their digital business.
Crowdfunding platforms are quickly becoming a viable source of capital for DTC brands, particularly those looking to build demand.
Although previously only used by people looking to get investment for personal projects and social awareness campaigns, crowdfunding platforms like Kickstarter and Indiegogo have gained a lot of popularity amongst DTC brands.
The success of these DTC brands usually comes from their skills in effective storytelling and building a community of devoted fans, who later act as ambassadors for the brand through word-of-mouth marketing.
The potential of crowdfunding is undeniable with companies like Mate (a foldable cycle brand) raising over $22 million across two campaigns and Misfit (a brand that manufactured fitness trackers) raising $850,000 through crowdfunding campaigns alone.
DTC brands can initiate crowdfunding campaigns on a variety of platforms, the most popular being Kickstarter and Indiegogo. Other platforms include notable names like Fundly, Patreon, Smallknot, GoFundMe and Rockethub.
It’s important to point out that usually the funding received on these platforms is only sufficient to kick the product off the ground during its initial stages of production. If additional capital to keep the business going is needed, you might need to look for other funding options.
Revenue-based funding is a relatively new form that has emerged over the past couple of years and gained a lot popularity amongst new startups and DTC brands.
It is a pretty straightforward funding method where a company enters into an agreement to share a percentage of their future revenues with a lender in exchange for money up front.
Loan repayments are essentially tied to the monthly revenue generated by the business. So, for example, if a DTC brand ends up generating a lot of revenue in one particular month, the repayment instalment would go up this month and respectively go down in low-revenue months.
There are several platforms that provide this funding option. For example, Shopify provides tailored offers to its merchants via its Shopify Capital feature. Similarly, Clearbanc provides capital and loans based on business metrics and revenue data.
What’s good about this type of funding is that lenders can provide initial operational capital to DTC brands to set up, produce products and market them digitally, and the brands can pay this money back as they grow in sales and establish a consistent consumer base every month.
With platforms like Indie.vc, hybrid funding is becoming a new form investment source for DTC brands. Hybrid funding is, in a sense, mutually beneficial. Lenders do not only lend capital to the entrepreneur, but also own a small portion of the company in return for consistent investment as well as expert advice and guidance.
Hybrid funding is debt-style funding with an added option of equity. The benefits of this funding method is that the company receives capital injections without having the burden of returning these initial investment immediately.
It also offers a priceless opportunity to learn from the experts in branding, marketing and customer retention through mentoring.
Regardless of the option you choose for your DTC brand, financing inventory becomes a whole lot easier when capital injections are taken care of – giving budding brands one less thing to worry about.
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