Raising capital is one of the earliest milestones for any business. But funding strategy doesn’t stop when sales start—it’s a continuous process that fuels growth until the business is able to cover its own operating expenses with revenue. Even then, most DTC brands will keep fundraising to pay for the expansion initiatives that will eventually lead to profitability.
So, how do these brands fund business growth? And what expenses or initiatives should that capital go toward? Great questions! Let’s dive in.
Funding strategy will look different for every company because it’s heavily dependent on the business’ model, goals, expenses, and level of maturity. Defined broadly, your funding strategy is your planned expenses and how you’ll pay for them over a set period of time—typically a few years.
For DTC brands, those expenses are probably basic to start: paying a manufacturer to produce inventory, customer acquisition costs, and fulfillment charges. As the company matures and expands, these costs might be covered by revenue, in which case capital may go toward hiring new team members, developing new products, or securing retail partnerships.
The point is, capital should go toward the steep startup costs of ventures that will pay for themselves over time. Your funding strategy should be a roadmap toward growth and profitability that will inform how you raise and spend capital.
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There are plenty of ways to secure capital, but they’re not all for everyone. More specifically, they’re not all for you.
Venture capital is probably the best-known way businesses raise funds (our research found 57% of DTC brands have raised at least some venture capital), but it’s not always a good idea—and not because the money isn’t there.
Venture rounds usually yield big investments, allowing companies to pocket millions of dollars over a few months and providing access to the firm’s resources. It sounds great, but there’s a catch: some venture capitalists expect a near-immediate return on their investment. This pressure can force businesses to operate under a grow-at-all-costs mentality, which often sacrifices efficiency or quality in favor of bigger margins. The numbers will look good on paper, but the brand’s reputation may be harmed, stunting business growth in the long run.
Venture capital was the bread and butter of the earliest DTC darlings like Bonobos and Warby Parker; but today, increased ecommerce competition and a few cautionary tales from lackluster IPOs have made investors more skittish. And wise business founders have begun to avoid the increased oversight that comes with such large investments, opting instead to grow slowly and steadily while keeping executive control over the trajectory of the business.
That’s not to say venture capital rounds aren’t still a viable option for DTC brands—new, business-friendly VC firms have come on the scene in recent years, allowing the companies in their portfolio to grow more slowly. This type of funding is best for brands that have a very unique solution to a ubiquitous pain point and a clear path to revenues of $100M or more.
This is where most brands get their start. Angel funding and seed funding both refer to capital raised through private investors in exchange for equity in the company (think Shark Tank). The difference is that seed funding happens during a business’ infancy—the seed—while angel funding can come at any stage of the company’s lifecycle.
These funding rounds net a smaller amount of capital than venture funding but usually allow the founders to maintain greater control of the business. Depending on the equity stake the investor is requesting, this type of funding can infuse a business with much-needed cash while giving up only a small share of the company. According to our research, 22% of DTC brands raised pre-seed, seed, or angel funding without ever taking a venture capital investment.
Sometimes founders dream up an idea for a product that gets consumers so excited, they’ll pay just to see it hit the market. That’s where crowdfunding comes in.
Crowdfunding is a nontraditional means of raising capital that involves collecting small amounts of money from a very large group of people. Founders may crowdfund from friends and family in addition to using online platforms like Kickstarter, where internet strangers can contribute toward your business idea. These fundraisers typically yield a small total, but are a good way to get your business off the ground or fund a new product line while galvanizing your customers before sales even launch.
Crowdfunding usually results in only a small chunk of change because most of the time, people want something in return for their money. If giving up equity isn’t an option, loans provide a traditional means of getting your hands on liquid capital fast.
Of course, loans come with interest. Unlike venture capital and equity investments, in which you pay investors a percentage of your income, loans have a static interest rate you’ll have to pay each month. For that reason, companies tend to take out loans for small(ish) amounts, since the interest payment is proportional to the loan amount. Other investors will also consider your debt-to-income ratio, so loans can have an adverse effect on your future fundraising endeavors.
If none of these fundraising options sound appealing, there’s always the option not to raise any money at all. Businesses that take no outside investment are bootstrapped. Our research found that about 4% of DTC brands fall into this category.
While bootstrapping your business is a more challenging route, it allows the founders to maintain complete control over the company.
John Marino, co-founder of bootstrapped brand Tuft & Needle, described it as a way to avoid certain risks:
"[W]hen you build something you love, and you know it's yours and there's nobody who can tell you no, it's your way. … When you decide to bring someone else in you don't know, it's sort of a gamble. That's a little scary."
The approach you take to funding should be informed by your business goals, current growth stage, and sometimes your market vertical. It’s important that you know what you’ll spend the money on before you ask investors to write a check.
What goal will your newly raised capital empower you to achieve? Are you looking to boost brand awareness to drive sales, or have you already saturated your current market? Is there consumer appetite for a new product line? Do you need to secure a manufacturer or fulfillment provider that’s prepared to scale with the company?
Your goals will inform how much capital you need. Funding rounds aren’t necessarily about collecting as much cash as possible—contrary to popular belief, too much money can be a bad thing if it comes with lots of strings attached.
Maybe your product is so popular, you can’t meet demand, so you need to invest in higher-volume distribution channels. Most DTC brands outsource things like fulfillment, but if you chose to bring it in-house, the startup costs would be enormous—venture capital might be the best way to go.
On the other hand, maybe you’re facing a short-term hurdle to higher order volume and increased revenues. If you’re looking to raise under $2 million, you’re probably better off seeking private equity.
Not willing to dilute your company shares any further? Need a short-term stopgap for a one-time expense? A loan might be your best option, especially if you expect to be able to pay it off quickly.
Be honest with yourself before you start fundraising. If you have an idea for a product but can’t define the problem you’re solving, quantify your customer base, or point to strong differences between your product and existing ones, a Series A is probably not in your future.
But if you’re consistently averaging 5,000 orders per month, expanding into retail stores, and eyeing a move into international markets, you’re probably ready for a big fundraising round that will launch your business into its next growth phase.
Choose your funding round based on how much capital you realistically need, how much equity you’re willing to give, and how quickly you need the funds. You can probably secure a hefty loan in a matter of weeks, but pitching investors could take months.
Earlier, we mentioned that about 57% of DTC brands have secured at least some venture capital. As it turns out, venture capitalists tend to favor some verticals over others.
Through our independent analysis of $7.6 billion in venture capital, we found that fitness, personal care, glasses, footwear, and cosmetics brands scored the highest funding rounds. The fitness brands we studied had a technological element, so both the cost of production and average order value were high, which probably drove the massive funding rounds. But personal care products comprised the next highest-grossing vertical: the median funding per company was just over $70 million.
Products with big addressable markets—like deodorant or razors—will be favored by venture capitalists. If your product is more niche, it’ll be more difficult to woo these investors.
Let’s say you’ve secured a solid fundraising round. Congratulations! Now you have to spend it wisely.
Too many founders lean too heavily into the adage that you must spend money to make money. They take on as much funding as they can get, then spend it on seemingly necessary investments like costly advertising, a too-big internal team, and too-early product expansion. These are important, but if the company hasn’t matured enough to support these initiatives, the company will become top-heavy.
Instead, focus on foundational elements: a solid product offering, distinct brand, strong customer acquisition channels, and a reliable and scalable distribution network. This might mean you have to navigate thin margins or raise prices to guarantee quality, but compromising on bedrock items will come back to bite you—probably sooner than you think.
Think back to elementary school. Remember the pebble-in-the-pond analogy? One small rock creates a ripple effect that ripples across the entire surface.
Understand that even the smallest change to your business strategy will cause a ripple effect across everything. Ecommerce fulfillment is especially susceptible to unintended consequences because it’s so complex. If you only try to address shortcomings once they’ve started causing you headaches, it could be weeks—and many thousands of dollars—before you reach a solution.
Here’s a revelation: businesses need revenue. You heard it here first!
Of course, this isn’t a surprise. Everyone wants to increase margins. Who wouldn’t want to save a dollar here or there and demonstrate healthier revenues?
But the reality is that you get what you pay for, and some corners just aren’t worth cutting. Sometimes it’s wiser to spend more in order to guarantee quality and save yourself time.
Your company’s operational complexity will grow exponentially as it scales, and a DIY mentality can break the company once it hits its stride and your in-house solution can’t keep up. When trying to decide how much is too much for a business expense, ask yourself if the costlier option will optimize your operations for continued growth. Are you needlessly spending, or are you investing in your company three, four, or five years from now?
Allow us to use a very tired cliché: Stop looking at the trees. Start looking at the forest.
Mistakes and setbacks are inevitable. They will happen. The secret lies in knowing which are indicative of foundational problems and which are short-term blips.
Maybe your fulfillment provider lost an order, and the customer left you a nasty review because their purchase didn’t arrive for three weeks. That’s going to sting, for sure.
But is it worth overhauling your entire fulfillment strategy when 99% of the orders from that month went off without a hitch? Probably not.
The same sentiment applies to every element of your business. Spend where you must to ensure you have repeatable, scalable processes—but be careful not to throw cash at every problem that comes your way. Sometimes the solution is simple, and sometimes the solution is no solution at all. (Or maybe it’s sending an angry customer an apology and a credit to redeem on your site.)
We wanted to know how modern DTC brands are navigating new challenges in the industry. So we analyzed 100 companies across 16 market verticals, collecting data on founder experience, fundraising, sales channels, and market presence through SEC filings, databases, news archives, and interviews to create our own direct-to-consumer playbook.
