The Inside Scoop is a series that chronicles the ups and downs of starting a Direct-to-Consumer (DTC) apparel company from scratch...in the middle of a pandemic.
Financing a fashion company is hard! We have talked about this before in our Kickstarter post. The TLDR is that Jane and I have been bootstrapping this company since 2019. I put the entire remainder of my student loans into the business and Jane liquidated some of her stock from Uber. We keep it scrappy - Jane lives at home to save on expenses and I am lucky to have a supportive partner who understands that I can't contribute to the household finances right now. We ran our Kickstarter in the fall of 2020 to augment our own contributions in order to produce our first collection.
We always said the Kickstarter would help us determine the answer to that all-important question for early stage entrepreneurs: do you have product-market fit? Well, we raised our goal amount in under five hours, and more than doubled that by the end of our campaign. In other words, the answer to that question was YES! With this proof point in our back pocket, we decided we wanted to get more products to market faster to serve our customers. That means more $$$. Hence, our decision to fundraise.
When you decide to fundraise you need to decide three things:
- How much equity are you willing to give away?
- How much do you need to raise?
- Who are you accepting money from?
HOW MUCH TO GIVE?
Investors don't hand out money for free! They expect a stake in your company in the form of equity. Your first fundraising round will (hopefully!) be the most expensive you ever dole out. It's a riskier investment because your company is so unproven, and your backers expect a higher reward. When you determine how much to give away in this round, take into account founder ownership percentages, future rounds of financing, and employee incentives.
Jane and I wanted to retain majority ownership of our company (between the two of us) through at least two rounds of potential financing. At the inception of your company, the founders likely own 100% of the company. From your own equity, you generally set aside 10% - 20% to incentivize future employees, commonly known as the option pool. Angel / pre-seed rounds usually give away between 5% and 20%. Angel / pre-seed rounds can get a little weird because people often use convertible notes or SAFEs (promise of future equity that converts during a future round). Seed or Series A rounds (the next round of financing) are 20% - 30%. Here's a super simplified way of how this could work.
100% Owner Equity
- 12% Option Pool (dilution happens to these guys too, was at 15%)
- 28% Seed (future financing round) and pre-seed SAFE conversion
60% Owner Equity
We opted to give away up to 10% to leave some wiggle room for future rounds, assuming that what we gave away converts at the valuation cap (super simple Quora answer here on SAFE conversion) we set. Of course, how much you have to give away also depends on how much money you need, which brings us to point #2...
HOW MUCH TO RAISE?
When deciding how much to raise, do the math and figure out how much you need to hit your next set of milestones, then add 20% (or more!) for contingency. We've even heard of people 2x'ing what they think they need. Let's face it, things happen. Make sure that hitting those milestones will mean it's easier to raise additional rounds of capital and missing those milestones will convince you to wind your business down.
We settled on a small (<$1M) angel round. We knew that, even with the Kickstarter and other traction, it was going to be difficult to raise money as a pre-launch apparel brand. We determined this amount would be enough to get us through 2-3 collection drops. Getting through a few more collections will allow us to learn more about our customer, adjust styles to her taste, and make sure there is sufficient demand to make this a profitable business.
The more complicated part of this process is figuring out how to value your company. The amount of money you get for the percentage of the company you give away depends on how much you can get investors to say your company is worth. In general, physical goods consumer brands are valued at $1M - $5M at the pre-seed stage. This assumes you are trying to hit it big, as opposed to being a "lifestyle" business (A lifestyle business is one that allows you to live comfortably, but you're not trying to be the next Nike). Depending on your traction, you might be able to get more or you might need to settle for less.
WHO TO FUNDRAISE FROM?
When we thought through who to talk to, we wanted to make sure that we were super clear on risk, that they were accredited investors, and that it would not change our relationship (aka they weren't emptying out their 401k to do this). Even if we're super confident that this venture will work, we know that there are always unforeseen events, with 95% of businesses failing. This brings us to angel investors, investors who are used to assuming this type of risk and understand what they're getting into.
How do you even find angel investors? Long story short - there is no good way to do it. This is where privilege and networks play a large role (you can get Jane to get into a whole rant on this and why there aren't as many entrepreneurs as there should be). What we did:
- Looked through public databases of angel investors
- Asked a bunch of friends for advice
- Conducted so much intense LinkedIn stalking that we got kicked to a premium tier
- Learned to make asks of any mutual connections
Obviously warm intros are the most helpful. Neither of us are great at asking people for things, but we really exercised that muscle (and are exhausted) from doing it so much. Even if you think you have identified a few well-aligned investors, you still don't know their check sizes, their investing philosophy, and or much information outside of what they list on their LinkedIn. We were able to figure out who could be a good fit based on some other investments listed, but other than that, it was difficult. We don't have a lot of advice on this. Send the email and see how they reply. It's Heather's personal life philosophy to "ask for everything you want; the worst they can say is no."
Angel groups can be helpful too, if you fit the criteria (many of them have criteria). Syndicates can work also if you are the right type of company backed by an institution, but keep in mind that for the admin fees to be worth it for the person running the syndicate. You often have a pretty high bar you need to cross in terms of # of people interested or $ put in.
Fundraising, depending on your personality, can be super fun! Or, if you're more like us, it is somewhat energy draining. You need to do whatever you can to make sure your business lives another day, so fundraising may be a necessity.
In hindsight, we are happy we went through this process of fundraising. We have way thicker skin, are more used to no's, and are exiting the process with continued belief in our ability to make this business work. Are we glad to stop emailing every person we've ever met? YES. Are we excited to get back to work on our spring launch. HELL YES. Whenever we felt down, we reminded ourselves that there are a ton of other well known businesses that had a lot of trouble raising (Twitter thread here). It's not an investor's job to be right all the time - in fact, they're more wrong than they are right. Obviously, this job is enough of a roller coaster already, but throwing in some daily rejections (and we didn't even take that many no's - in 2 digit rejection range, not 3 digits), your roller coaster of emotions goes through more loops. An inspo to all fundraising entrepeneurs below (Peloton):
"Foley raised $400k @ $2m post-money valuation from 8 angels. From 2011-14, he pitched 3,000 angels & 400 firms. Almost everyone said no. Eventually, he raised $10m from 100 angels. The company is now worth $20b." (Full story thread)
Fellow founders - stay hopeful if you do want to raise, but know there are often alternative ways to finance if the process is all too much. We are rooting for you!