Choosing the right investors is a tricky decision; ultimately the route you decide to go down will shape the company that you eventually become
Raising money to grow your business is one of the most important things a startup founder has to do. Yet it’s also one of the most distracting. Donna and I have both run startups before and we know from experience that every week you spend raising capital is time you have to spend away from growing your company.
But the other thing I have learnt about raising money is that it’s not enough to get it. You have to think very carefully about where that investment is coming from because the source of investment you choose can have a profound impact on what ends up happening to your business.
Broadly speaking there are two sources of funding for a startup like Dressipi: venture capital and angel investors. Venture capital tends to get most of the headlines, as that’s how companies like Uber get the money they need to grow multibillion-dollar businesses very quickly. Angels tend to fly a little more under the radar. They’re usually private individuals who have built and sold businesses themselves and want to plough some of their money back into interesting new ventures.
Obviously what they both want is a return on the money they invest but how they achieve that is very different. From the point of view of a founder like me, I know that a venture capitalist wants a business that will scale up very quickly. An angel, however, will tend to look more for a solid business with founders they believe in. To put it simplistically, venture capitalists are all searching for their unicorn, while an angel would be happier with a racehorse.
Both will want to take some time getting to know you before they commit to funding. That can be a really time-consuming – and sometimes time-wasting – experience in itself. But it’s important to remember that due diligence cuts both ways. I know from experience that it’s essential to do your homework on individual investors – angel or VC – to work out whether they’re the right partner for you. A good rule of thumb here is to imagine how they’re going to help you if things aren’t going well.
When we started Dressipi and began looking around for funding, we thought long and hard about which route was better for us and decided on the angel route. We did this because while it’s a route that typically raises less working capital, we thought it was better for our business to learn on a smaller amount of cash. It’s been tough at times, that’s undeniable. Yet it’s also meant that four years down the line my co-founder Donna and I own far more of what we now know is a sustainable business than we would do if we’d taken VC funding.
We also chose this route because we thought it was more manageable for us. VC funding can supercharge a company but it can easily takes your burn rate up, say, from the low thousands to a £250,000 a month. Suddenly having to manage that level of spending and deliver the growth your investors expect can be a challenge; what you agreed with your investors may not be the right route for your business after all and so you can end up spending a lot of money going down the wrong path. We knew we were going in to fashion recommendation, a fairly nascent sector at the time. The first thing we had to get right was delivering the right customer experience, building awesome recommendations and building relationships with retailers.
You also have to be very aligned with whoever your investors are. We have always believed in building a business that adds real value to our partners and ideally one that is profitable. We are very nearly there and so we aspire to be in a position where we can achieve fast growth organically – this is not always the preference of a VC. The management skills you need to run a startup and those you need to run a large business with VC investors that might be heading for a flotation are very different. And it is very rare to have both.
What you often find with startups that take on VC funding is that founders very rarely stay in control. Instead the investors bring in a seasoned CEO with experience of high growth. Depending on where we go with Dressipi, this may well be a route that Donna and I decide to go down. But, fundamentally it is about ensuring that we are building the business we are passionate about in the way that we believe delivers the most value to all our stakeholders. And that is what I firmly believe we have achieved to-date.