This is a guest post by Daniel Rodic. Daniel is the head of market development at Clearbanc, where he leads new product partnerships and lines of business for Clearbanc. Prior to that, Daniel started and sold multiple businesses in the eCommerce industry.
Once you’ve found product-market fit and a scalable acquisition channel to grow, you’ve reached a place most eCommerce founders can only dream of.
The only constraint on that growth is accessing enough cash to invest in more ads, more inventory, and more SKUs to capitalize on your set up.
Before you go on a fundraising journey to unlock your next phase of growth, take a moment to reflect and make sure you are in the right position to scale.
Having founded and sold two eCommerce businesses, these are the questions I suggest you ask before jumping straight into fundraising and growth mode.
How to understand if you’re ready to scale
Really dig into the economics of your business to understand if you truly have positive unit economics and a strong cash flow cycle to support the business going forward.
On a fully-loaded basis (when you account for your cost per acquisition, cost of goods and other variable costs), you need to ensure you’re profitable relative to your lifetime value, and your model can withstand a high degree of sensitivity.
These are some important questions to ask yourself and review with your team.
What is your customer lifetime value (CLV) and how has it trended with each new cohort of customers you bring into the business?
If you are seeing stable or (ideally) increasing average lifetime value per new customer over time, that’s a sign you can support higher CPAs if required. If you have a subscription business, test remarketing campaigns to move as many of your customers onto upfront annual payment plans to increase cash on hand.
My eCommerce startup Luxe Box was able to successfully convert 52% of our base to annual subscription plans to give us a whole year’s worth of cash to fund our operations without any outside capital.
What is your agreement with your suppliers?
If you can negotiate better payment terms, ideally minimizing or eliminating upfront payments while extending payment terms, you will require less cash-on-hand to invest in the inventory required to satisfy your projected new demand.
Have you optimized the rest of your supply chain to minimize the time it takes goods to arrive at your Deliverr warehouse?
Leveraging partners like Flexport to optimize your freight forwarding process, or timing your advertising boost with the arrival of inventory can help you minimize days outstanding on inventory. These techniques can further minimize your cash requirements to scale.
Can your economic model support the increase in marginal CPA costs?
Many marketers get trapped in looking at average CPAs, but the more important metric to consider when scaling is the marginal CPA. This refers to the additional cost of acquiring an additional customer.
Here’s a basic example.
Scenario #1: Advertising just on Facebook
Let’s say you spend $10,000 a month on Facebook to acquire 100 customers. Your average CPA is $100.
Now, let’s assume you pressure test the ability for Facebook to scale, so next month you invest $15,000 on Facebook and acquire 125 customers.
Your average CPA went up 20% from $100 to $120. However, your marginal CPA skyrocketed.
You paid an additional $5,000 to acquire an additional 25 customers, which meant you paid $200 to acquire those customers.
If your unit economic model can’t support paying $200 to acquire a customer, you are going to lose money on those 25 new customers.
Taking this a step further, understanding marginal CPA across channels is an effective way to understand where you should put your next marketing dollars.
Scenario #2: Advertising on Facebook and Google
Let’s assume your Facebook spend follows the same pattern as above. It costs $10,000 to acquire 100 customers on Facebook, and extra $5,000 to acquire your next 25 customers.
Now let’s assume you also spend $10,000 on Google and consistently acquire 80 customers. Your average CPA on Google is $125.
Let’s assume you then increase your Google spend next month to $15,000 and acquire 115 customers. Your average CPA is $130 and your marginal CPA is $142 as you paid $5,000 to acquire an additional 35 customers.
|Channel||Average CPA after $5,000 increase in investment||Marginal CPA on $5,000 incremental investment|
When you compare these illustrative economics on Facebook to Google stats side-by-side, if you followed average CPAs, you would put your next dollar into Facebook.
But in actuality, you’re getting a 29% cheaper deal if you put that money into Google.
Don’t get trapped into looking at just average CPAs, make marketing investment decisions on marginal CPAs.
Getting Funding to Scale
Congratulations again. If you’ve read this far, we can assume you have checked all the boxes:
- You have a deep understanding of your customer lifetime value
- You have optimized your supply chain and cash requirements
- Your economic model can handle material fluctuations in your assumptions
- You understand where you will put your next marketing dollar based on marginal CPAs
Let’s talk now about getting access to the cash to feed this growth engine.
Many founders fall into the trap of assuming all capital is equal. They make the false assumption that once the cash is in the bank, the source is irrelevant.
Founders who make this false assumption are not optimizing their business to the best of their ability, and should match the cost of capital they are incurring with the expected potential returns on that capital.
The most natural route many founders explore is raising equity capital by finding angels, VCs, PE firms or other private investors who will put money into the company for a percentage ownership in the business.
The cost of this capital is very high. Assuming an equity investor makes their average return of 2x to 3x on their capital, those are returns that you could’ve realized yourself as the founder had you not sold a piece of your business. This doesn’t factor in the potential loss of control or flexibility, depending how much of the business you sold and what other provisions you’ve agreed to.
This is not to say equity capital is bad. Instead, given the costs of the capital, you should reserve spending it on things that can deliver a similarly large 2x to 3x return.
Those are investments like:
- Hiring a senior leadership team to improve your overall capabilities as a business
- Growing a wholesale channel to unlock B2B customer revenues
- Investing in R&D to develop new SKUs, which increase overall customer LTV and lets you support paying higher CPMs on your advertisements
- Investing in major infrastructure upgrades (machinery, technology, etc.) to reduce long-term fixed costs or variable costs
These are risky investments with uncertain outcomes, which match the investment profile of private equity investors.
Assuming you’re getting a strong return on ad spend on a marginal basis based on your tests, that outcome should be quite predictable and certain. You can match that by using Clearbanc Growth Capital, which is a lot cheaper than equity and is repaid as a percentage of revenue.
Magic Spoon, one of the fastest growing direct-to-consumer brands in the cereal industry, shares in this video how they used Clearbanc Growth Capital to 10x their marketing spend.
Clearbanc uses a data-driven approach to project the future performance of your business based on your historical business data, and gives you access to capital to spend on Facebook, Google, Instagram and other leading ad platforms at much cheaper rates than other capital sources.
It takes 48 hours for a financing decision, and between 5 to 7 business days to get access to capital.
You repay Clearbanc as a percentage of your revenues, meaning you’ve now tied the cash flow cycle of your advertising spend to match the revenue flows of your business.
Clearbanc as a capital source can be replenished automatically via the customer facing Clearbanc app, ensuring you have on-going access to capital as you need to scale.