Performance Capital

Turning Smart money into Super smart money.

by DigiVest

Fueling your future

eCommerce businesses are like any other going concern – they live and die on their ability to manage cashflow and have the capital they need to invest in growth, whether that’s inventory costs, increased advertising spend, technology or localisation costs. Many of today’s lauded eCommerce and online brands have taken years to record a profit, burning through a lot more cash than they generated in the process in their quest to scale. There are countless brands considered household names here and globally that are still operating at a loss, while others operate at margins so small that they only win through sheer volume.

Amazon is a classic volume play with net profit margin in 2019 of just 3.6%

So how did they manage to not just stay afloat but grow at tremendous rates both domestically and globally, despite their costs exceeding their revenue?
They had investors and access to capital injections ahead of the curve to fuel their ambitions and fund key growth stages. Whether that was investing into their marketing efforts to grow their customer base and revenue; technology developments that drove conversion and provided unique customer experiences that gave them a competitive advantage; data investments to help manage inventory, cash flow, and to identify when to inject capital; or funding expansion through product introductions and new market entries. 

The pursuit of scale through expansion is a key reason these eCommerce players succeed. While cashflow and marketing are key factors in eCommerce failure, becoming investible is crucial to long term success and a founders ability to exit. By accessing capital at key inflexion points these founders have fueled the expansion needed to scale fast without losing momentum or market value. Driving the elusive volume needed in eCommerce to provide economies of scale and put them on the path to profitability that makes them an attractive proposition to potential buyers, equity investors or exit via IPO.  

Traditionally founders had two routes to capital:

Paying for Capital

For a long time capital was only available to those able to show major financial institutions they had sufficient cash flow to service a loan. But getting to this point takes time to achieve, meaning that founders need to have sufficient funds to fuel their dreams on their own, and many end up spending their life savings only to find that this finance is still not available to them. While those who do manage to meet the requirements frequently end up chasing revenue to pay their debts instead of reinvesting in growth, leading to a vicious cycle of debt compounding faster than they are growing and eventually leading to forced bankruptcy.

Trading Equity for Capital

Venture capital is nothing new, but it’s only become more widely available to eCommerce brands in the last few years and with many high-profile stories of VCs injecting phenomenal sums into early-stage businesses, it has gained an aura of success that attracts many founders. Often dubbed as smart money for its benefits over borrowed capital, there is no doubt that VC’s can be great partners, they offer capital, advice, access to a valuable network and even immediate prestige. Despite the hype and the lack of any need to pay for your capital, it is far from free money and comes with hidden costs that founders often underestimate. 

To access VC investment a founder has to be willing to give up a substantial amount of equity before their business has gained a valuation that truly reflects its future potential. Yet to achieve that potential, they need the capital now to grow their business leaving them little choice but to give away equity too early for much less than they’d like. In return by taking a large amount of equity their VC partner gains a large degree of oversight and influence in the business, after all the money they are investing belongs to other people meaning they have a responsibility to oversee how it is spent. This financial governance and compliance can often become a hindrance to founders as they now need to justify their decisions to someone else. If founders select a VC partner who turns out not to be aligned to their vision and way of thinking, it can lead to conflicting priorities and a loss of control, in some instances the founder finds themselves being outvoted or even ousted from their own business by the very investor group they brought in at a low valuation essentially being stripped of the company they created for very little financial upside. 

Super smart money –  a new way to scale

So what if you can’t or don’t want the financial burden of paying for capital, and the idea of giving up control of your dream doesn’t appeal? Up until now the only remaining option for founders has been to try and bootstrap their way to growth but this option is only available to those with a network of family and friends who are willing and able to provide financial support. DigiVest believes in leveling the playing field and creating value for our capital investors without our founders having to dilute too early and having someone else dictate how to grow their business.

We call our new model Super Smart Money, it focuses on growing your valuation and therefore investability with a skin in the game model designed to  generate revenue and growth with a partnership approach,  injecting performance capital at the right time based on performance whilst removing the barriers on the way to scale.

By using a data driven approach including  machine learning based algorithms to identify the right time and right amount to invest, we protect founders from giving away too much or too early. Clearly pre-defined revenue milestones and investability metrics create an almost seamless journey to accessing capital, triggering a virtually automatic release of funds as the business requires so there is no loss of momentum.

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