Let me start with the beginning: March 2012. The Luxury Closet had been in operation for three months; the website had decent traction, sales were increasingly steadily – you could say these were the signs of a profitable start-up, and we certainly had a successful proof of concept on our hands.
We were also lacking in many ways - no A-team, no systematised process, and no path to scale the business 10 times.
I knew, however, that The Luxury Closet had the potential of a business model that could build up to a hundred-million-dollar company. The question was: “Do I want to grow and run a privately owned company like my father, or a venture-funded company like some of the start-ups around?”
My ambition was to build an amazing company in the shortest time span possible. But, bright ideas and creativity, belief and commitment alone can’t help you build a multi-million-dollar company. Capital and expertise do. So, the path I chose was to raise venture capital funding.
How do you make your business attractive to investors and make sure you get the funding you need? How do you determine which investors are the most beneficial and should be pursued? Here are some insights and tips from my own funding journey experience, that may help other start-ups secure new investment, whilst also building strong companies.
What investors look for
It is important to understand what institutional investors look for: low risk and high returns, as early as possible. It makes perfect sense. Venture capital funds (VCs) invest money on behalf of other investors, and need to show solid returns. It’s the complete opposite of getting funding from a bank, VCs do not want interest or dividends, but rather assurance of a business’s ability to scale two to three times each year.
What they look for remains fairly constant: a scalable business model, addressing a very large market, and a team that will make it happen.
It’s your job to convince a VC that your idea and team will build the next hundred-million-dollar company. You can raise money from as early as having a plan on an excel sheet, or after you have customers, or even when you have a sizable business and need growth capital. The way VCs look at the three factor changes as your grow from seed stage, to raising a Series B capital round.
Would you rather start a dry cleaning store, or build an app that connects everyone’s nearest dry cleaner to them? The first is an example of a traditional business that requires capital to start, is limited by area and space, and needs money each time you want to open a new store. The second is an example of a marketplace where one app can connect a million people to ten thousand dry cleaners.
You need to have a good understanding of the factors at play in your industry and how they may impact on your growth.
At The Luxury Closet, we made a calculation and chose to go online from the beginning, instead of opening a physical store, which would have put a restraint on how much stock we could keep and display, how many people could visit the store, or number of staff it would take to assist clients, and so on.
At an early stage, VCs will examine each step of your business model and ask what it would take to handle 10 times the volume.
Each business has bottlenecks, make sure yours are not a deal killer or you have a novel way of solving them. As your company grows and you clear initial hurdles, scalability presents itself as metrics. For example, how much does it cost you to get a customer, and how much does the customer spend with you? While raising further funding rounds VCs look for models where capital is efficiently deployable and will directly produce scale.
Would you rather invest in a company that makes skateboards, or self- balancing two-wheel scooters? One is an example of a market that is shrinking, while the other that is witnessing explosive growth.
Knowing the market size and its growth potential can be a big differentiator for your start-up. Your business model needs to fill in a gap in the marketplace, create and own that niche, and also be able to transform the market in the process.
Take The Luxury Closet as an example, our business fills in the gap for a high quality customer service, secure online marketplace that buys and sells authentic, pre-owned luxury goods. The Middle East is a $10 billion established luxury market, growing fast, with high internet penetration, which makes the case for starting an online marketplace.
Taking the above example of electric scooters: Would you rather invest in an MIT engineer whose family runs an electronics manufacturing company in China, or your friend who works in a bank and loves to ride his two- wheel scooter?
No matter how different and novel your business is, the reality is its success depends entirely on its execution.
At seed stage, VCs put all their faith in the founding team, and thus look for experience. In most cases, founders start a business in a sector they have expertise in, but as they grow they need to surround themselves with a handful of capable, experienced and passionate people with complementary skills to fill in key roles, from technology and customer experience to marketing and finance.
Again, I can’t emphasise this enough: VCs are not interested in experimenting. They want to know your business is the great bet. In today’s hyper-connected world, it’s almost impossible to come up with an idea that is truly original. It’s very likely that when you do your research you’ll come across some solutions already being implemented somewhere in the world. That doesn’t mean you discard your idea. Quite the opposite: you take it a step further. You add on to it, fine-tune it, make it better, make it stand out, create a compelling value proposition.
When we were preparing for the launch of The Luxury Closet, we came across several similar businesses based in the US and Asia, but these only strengthened our belief in the potential of our business here, in the Middle East market.
So, we went ahead and we focused on the key metrics that proved we had a full product on our hands - ready to be optimised, and a profitable consumer acquisition plan to go along with it.
Always budget your execution plan. You need to know how far the money will get you and the milestones you’ll reach and by when. So, set tangible KPIs to show your investors the progress made and prove your team’s capabilities.
Also, set the time for the next round. Budgeting this way, gives your strategy discipline.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.