I’m feeling energized! A had another conversation with my co-founder. We were looking at an almost impossible fundraise. After our chat, we landed on a plan that makes raising money achievable. It’s early in our process. We have subscribed to the roller coaster of uncertainty and determination. Here’s a look at how our conversation helped us change our strategy.
Venture capital does not like retail
Last week, I looked at 5 important questions to consider before pitching to investors. A core question was about validation and PMF. At first, we wanted to start our business with an entry into retail (physical locations). We would need to raise a lot more money, increase our fixed costs with leases, and hire staff. At worst, investors could view this as a real estate play. It could be an instant turn-off.
VC funding in retail dried up in 2022. 2021 was a banner year, and then every thing changed. Venture funding hasn’t returned in size anywhere except AI since then. Investors are most interested in tech companies. Yet, they are more discerning than ever. Does the tech solve a big enough consumer problem? Is tech core to the business model or mentioned in the pitch deck 100 times? Venture investors are not looking to fumble the bag with interest rates being so high. They have alternative ways to generate comparable returns with less risky assets.
Venture capital loves high returns and mitigated risk
The CPG space has also fallen out of favor. This is the general segment we’re entering. Consumer brands were on fire but the excitement masked a lot of problems. For instance, many CPG businesses raised a lot of cheap money and focused on growth at all costs. The model worked ok when acquiring customers was also cheap. They gravy train can’t last forever. Money got expensive and so did customer acquisition. Those business models had unprofitable unit economics. We’re seeing many examples of these startups and their investors getting burned. See: All Birds.
It’s all more complex than my summary. But, it’s important to note where VC investors may be sensitive and have concerns. We can address them upfront. One way to mitigate risk is to shift strategy from physical retail to online. And although DTC and CPG is scary, we can show a solid go-to-market (GTM) strategy and a data driven process. The biggest question: How will we acquire customers for less?
Having a perspective in saturated markets
Companies succeed when they solve problems for customers. Finding the right problem to solve is the hardest job for an entrepreneur. We’ve identified the problem in our industry. There is too much choice. We are in a curation economy. People are looking for authentic authorities to help them with buying decisions. Our industry hasn’t caught up.
We are an attention economy. Nobody has time for anything. Attention spans are shorter than ever. There is more content than ever. We’ve made things easier and harder at the same time. Our industry has missed the boat on taste, media trends, and consumer shopping shifts. If you want to succeed in saturated markets, you must have a perspective.
Our perspective is that consumers want a curated selection of product. They want to be able to educate themselves on the product in less than 30 seconds. They don’t want to feel intimated. They want a brand experience that feels relatable and authentic. And, they want a sense of community. Lower friction and more trust.
Dreaming of lower CAC and higher LTV
We can’t approach investors with a lackluster margin story. They don’t want to hear that paid media is our solution to getting customers. Our initial brainstorm yielded some great ideas. Considering your go-to-market strategy? Here are some ways we are thinking about keeping acquisition costs down.
- Entertaining and educational content. Create short form content that allows customers to feel smart at the next dinner party. Integrating the content within the shopping experience will lower friction.
- Rockstar affiliates. Our industry is full of experts that have never gotten their shine. If we platform them, we can turn them into an authority and sales pipeline for us.
- Trend surfing. Provide expert curation on our primary offering. Then, expand the offering to include the more of the customer’s lifestyle needs and wants. Nobody in our industry is doing this.
- Gamification and loyalty: With curated offerings there are ways to motivate purchases. Consider ways to reward customers and add surprise and delight to the experience.
- Personalization on steroids: Our industry is all about taste. Taste is an area ripe for personalized recommendations and education.
Founders love options
Making this shift, from retail to online, allows us some leeway. It means we can raise less money. Raising less money is still hard but it opens up the types of investors we can approach. We can focus on friends and family, as well as angel investors. Having a pre-seed round allows us to explore our idea and gather data. This approach gives us a chance to build something and achieve validation and PMF. If all goes well, we’ll be in a better position to enter the seed stage. Bonus, we don’t have to incur a bunch of fix costs that will erode our margins and unit economics story. It’s a win-win.