Capital Planning For DTC Companies

Few decisions a founder makes can have a bigger impact on outcome than choosing how to finance their company. Still, many founders avoid capital planning altogether or address it in an ad-hoc manner. Why?

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In talking with founders, we uncovered several problems they faced in capital planning, modeling and assessing their options:

• Among founders, there is uneven knowledge of capital options and the capital marketplace, and most founders’ mental models for raising capital are based on venture capital dynamics.
• Too often, capital planning becomes tactical (“We need a new deck!”) and divorced from long term goals (“We just need money for the next 18 months, because…that’s when we’ll need more money”).
• Assessing options is hard and often thrown at an over-worked CFO or VP finance who may or may not have the modeling skills and methodology to set up the best analyses.
• Cost of capital is difficult to calculate and often purposely obscured by providers who use misleading headline rates and terminology.

Choices about capital today create implications for the future.  The VC who funds you today expects you to deliver 10X+ growth, and expects you to raise more capital in the future to deliver that growth.  In other words, you are signing up for dilution today and a path of future dilution to deliver on that promise of massive growth.

To help make sure you're prepared to make the best possible decisions, we suggest using the framework below to improve your capital strategy.

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First, know yourself

• Building a massive company in a massive market and going public is an awesome goal.  Is it your goal?  It’s great if it is.  But it’s OK if it’s not. 
• All the successful founders we have met are clear-eyed about where they are and where they are headed.
• Your vision will not only guide your capital choices, it will affect your ability to close on those choices.  You can’t sell what you don’t believe, so know yourself and your goals.

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Second, know your real options.  

• Companies spend too much time chasing unrealistic options.  Getting intros, setting up and preparing for calls and meetings, preparing analyses, answering questions, initial due diligence and follow ups all take time and effort.  And capital providers hate saying no; so you are often left in the limbo of the soft deny.
• We all know venture capital is looking for massive growth.  Does your TAM and history really support that story?  Venture debt often follows venture capital.  If you don’t get the VC money, many venture debt funds are unlikely to fund you.  So understand which capital partners best fit your story.
• Understand your real options and focus accordingly.

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Third, have the people, methodology and tools to help make decisions

• Too often, decision making comes down to (i) advice from a mix of people with varying knowledge, (ii) some conventional wisdom and (iii) some basic analysis usually designed to support the decision already made.
• All capital comes at a cost.  What are the full costs given your growth and the terms proposed?  How do you factor in warrants?  For revenue-based options, how quickly are you growing and how quickly will you end up paying back the advance?  Can you use the money immediately or are you paying off (and down) an amount that you realistically can’t use for several months?  Good models and comparison tools are critical.  It’s simple, but bears repeating, that founders pay for equity and the company pays for debt.    
• Choices today can create costs in the future.  What growth and future fundraising are you signing up for when you take money today?  
• Capital also comes with terms.  Founders too often accept terms under the most optimistic of projections.  There’s nothing wrong with being optimistic.  Just don’t make your capital assumptions with that mindset.
• Get the right people around you to help you with capital planning.  Get or build the right analytical tools.  Think about and model for the fundraise after the next fundraise.

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Fourth, understand that it’s not you.  It’s you compared to everyone else.

• Every capital provider is trying to maximize their returns and they do so by choosing from the best options they have at hand.  This means you are judged relative to all the other options they have.  Just because a capital provider did certain terms 9 months ago, doesn’t mean they will do that deal today.  The markets have changed and how you look relative to their other opportunities has also changed.
• It’s hard to honestly see your company from someone else’s point of view.  But that’s exactly what capital providers are doing every day.  An honest assessment of your company’s strengths and weaknesses in comparison to other companies is critical.
• Metrics, benchmarks and the self-knowledge of how you compare to peers and other companies will let you highlight strengths and proactively address weaknesses.  It can be the difference between “not for us” and “this metric needs watching, but if we structure properly, we can live with it.”

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Fifth, invest in better data and better analyses to attract better capital

• A comprehensive and deep understanding of your business reduces risk for capital.  But it’s difficult to provide.  And not all capital sources know how to analyze it.
• Order-level analysis of unit economics using cohorts is the gold standard. Learn how to do it or find a partner who can help.
• Granular data and analysis gives confidence.  Sparse data (and the attendant lack of understanding) raises concerns.

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Sixth, focus on relationship and terms alongside price.

• How is your capital partner going to react if things get dicey?  What sorts of covenants and terms are they requiring?  Are there personal guarantees?  Everyone is friends when closing deals.  But what happens once you have signed?  
• Is the capital provider building a long-term relationship with you?  Or are they highly transactional?  At one level, money is money.  But if you can, work with partners where you can do more with them over time as you both get to know each other.  You are going through the work, so why not try to leverage it for more in the future?

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Capital planning is complicated work and can be hard to prioritize in the midst of running your day-to-day operations. But few choices you make can have a greater impact on the outcome for your company. It's critical to find the right partners and make time to have thoughtful conversations about your options and their implications.

If you're ready to start the conversation, we're here to help.

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