Financing and growth strategies for eCommerce business

90% of eCommerce startups fail within the first 120 days of their launch. One of the main reasons for their failure is often a lack of funding or poor management of their funds. Learn more about the main financial solutions available and how to optimise your financing strategy.

90% of eCommerce startups fail within the first 120 days of their launch. One of the main reasons for their failure is often a lack of funding or poor management of their funds.

One of the most common mistakes of eCommerce founders and marketplace entrepreneurs is to focus their efforts on the commercial strategy, leaving aside the establishment of a good financing strategy.

At RITMO we believe that, just like the commercial strategy, positioning or logistics optimisation, achieving an optimal level of financial efficiency guarantees, to a greater extent, the company success. For this reason, on December 14th, we organised a webinar with the aim of sharing with the audience a vision from the point of view of an entrepreneur, investor and external advisor about the process of developing a financing strategy for an eCommerce and its importance for the company's growth strategy.

For the session, the experts Alfredo Iglesias (Investment Analyst at Sabadell Venture Capital), Oliver Von Schiller (Partner at ECIJA Advisory), Marta Frenna (CEO and Co-Founder at Greyhounders) and our colleague Jorge Jüttner (Head of Partnerships at RITMO) joined us.

You can access the video of the full session here, please, note that the whole session is only available in Spanish.

Below you will find a recap with the main ideas shared by the speakers at the webinar "Professionalise your eCommerce, Financing and Growth Strategies".

Financing strategies for eCommerce

When an entrepreneur decides to start a business, his main objective, in the first instance, is to launch an MVP and validate it in the market.

This action does not always require a very large injection of money and is usually financed by the founders themselves and their closest family members or friends, known as FFF (Family, Friends & Fools).

However, the focus of the founders in this phase is on obtaining a product that fits the market (e.g. launching an eCommerce with vegan cosmetics products) and working on how to start scaling up, the financing strategy is relegated to second place.

The problem comes when, in order to carry out the next phase of growth and expansion, it is necessary to leverage the company's cash flow, at this point the financing strategy becomes crucial.

Private Equity (Venture Capital & Private Investors)

Choosing private equity financing means giving up a percentage of the company. It is the most expensive type of financing that exists but it is especially helpful in the early stages of growth were accessing other types of capital is difficult due to the high uncertainty that projects can present.

This type of funding is available through private investors such as Business Angels, Family Offices, Venture Capital...

Alfredo Iglesias, Investment Analyst at Sabadell Venture Capital, says that early-stage funds base their investments more on the vision, the market and the founders’ team than on metrics, as they are very early stage.

Not all types of businesses are suitable for VC funding as they are looking to invest in fast-growing companies with a 5-10x growth goal.

Revenue Based Finance

A type of alternative financing offered by companies specialising in eCommerce funding such as RITMO. RBF model consists of providing growth capital for businesses that will be repaid at a fixed interest rate through a fixed percentage of future sales. The capital injection will be used to fuel digital marketing campaigns or the acquisition of inventory.

To be eligible for this type of financing you will not have to provide any collateral or personal guarantees, only the metrics of your eCommerce. As in the case of Venture Debt, we are not talking about rescue capital but capital to boost the growth of online businesses.

The most interesting points about this type of financing are:

Non-dilutive: founders and previous investors keep their shareholding intact.
Flexible: the rate of repayment of the loaned amount is determined by the sales of the business itself.
Fast: in less than 48 hours after the application, the funds are available in the bank.
No personal guarantees or collateral.

How to optimise the different financing methods according to the company's momentum?

Although we have already briefly outlined this for each case, the different financing strategies we have mentioned are more interesting or not according to the momentum of each company. In other words, an eCommerce that is just starting to acquire its first customers has nothing to do with an eCommerce that is in a phase of accelerated growth, making large investments in digital marketing and opening new markets.

In the end, funding agents are not substitutes for each other, but complementary. The key is to optimise how you make use of the capital that comes from each channel.

The ultimate goal of all eCommerce entrepreneurs is to scale their business as quickly as possible without sacrificing company equity.

In the initial stage, if you want to grow quickly, it will probably not be enough to reinvest the profits in growth (as in the case of bootstrapping) and you will probably have to get the support of a private investor or fund to make a small injection of capital to support these first steps of attracting talent and developing the product.

Once the eCommerce goes through a phase of expansion and growth, it will need to make a large investment in customer acquisition marketing and in many cases inventory sourcing. These types of actions involve an upfront investment of money that will be paid back with sales. It is precisely this upfront investment that can put a strain on a company's cash flow and should not be paid for with capital raised from financing rounds as it is the most expensive capital to raise.

To finance this type of marketing and inventory actions, once some optimistic metrics are already in place, eCommerce founders can rely on Revenue Based Finance companies. This financing model, as we have already mentioned, will allow you to access the necessary funds to invest in advertising and restocking and you will be able to repay with a set percentage of future sales so that the repayment pace will be the pace of your sales

"Cash is king" is one of the best known and truest quotes in the business world. In the end, having a healthy cash flow that is used wisely will allow you to quickly and sustainably scale your eCommerce business.