Investors in DTC brands, what are they looking for?
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There is a popular saying that goes: Money isn’t everything, but everything requires money. This statement rings true to almost every aspect of our life, especially in business operations. Acquiring capital to start a business is a fundamental move that can determine your decision.
For some brands, bootstrapping is the quickest way to get started. According to a survey conducted by TFR, 74% of brands prefers bootstrapping. However, after a certain point, companies may require external funding in order to expand. This is when external investors, such as angel investors and venture capitals, might get involved.
Angel investors are individuals who provide capital for startups or entrepreneurs, typically in exchange for ownership in the company. Meanwhile, venture capitals are funding given by institutions to startups or other young businesses with a potential for high growth.
The question is, how can direct-to-consumer (DTC) brands attract such investors?
One of the most important investment criteria is the story a brand offers, according to Christopher Angkasa, managing member of Denali Mitra Investama, a Jakarta-based angel investor firm. Angkasa told TFR that Denali has around 30 portfolio companies, including DTC men’s shoes brand Brodo, Clapham Company - a co-working space in Medan, as well as stationery shop Letterist.
“I don’t invest in specific sectors; I invested in Brodo because there is a good story there that can inspire a lot of people,” Chris said. According to its website, Brodo is the first DTC shoe brand in Indonesia and aims to offer high quality, stylish and affordable shoes.
GDP Venture, which was founded by Martin B. Hartono, son of Djarum’s R. Budi Hartono, is an active venture investor in Indonesian Internet companies. While it has a number of fashion brands under its belt, such as Brodo and luxury fashion secondhand marketplace Tinkerlust, GDP has not used crafts, heritage or sustainability as its key investment criteria.
“We like brands that have a strong identity and community,” GDP’s Investment Partner Antonny Liem said. “Strong identity means the brand has a clear vision, story and promise, and the brand can translate them into products that resonate with their customers. Through that, their customers will be loyal and eventually become their community.”
Having said that, a company needs to have cash flow first and foremost. While some investors may emphasise profitability, Angkasa believes that cash flow is the most important thing. “Cash flow is like a breath you need to survive,” he said.
What should brands do to get investment?
Antonny said that a company must be able to prove that they have the following:
Product-market fit: The brand’s products are able to meet customer needs or taste, and sales are increasing;
Healthy unit economics: The company has found the “right formula for their business,” is able to make money and is clear on what the costs are;
Scalability: The company must be able to show that it is a scalable business and not just a hobby or passion project;
Path to profitability: If the company is not yet or barely profitable, it has to be able to show the path to a sizable profit in the future;
Knowing the finance: The company needs to have a proper cash flow management, be clear on how much they need to raise, the purpose and where investment is going to bring it to.
It is also important for companies to determine why they are seeking funding.
“They should seek investment only when they are sure that it (the investment) will help them accelerate and scale, not when they are still trying to find the right product or market,” said Antonny.
“Taking outside investment means that there is a pressure to perform, which may restrict the creative process. When you take the money, you have less room for error,” Chris explained.
He also warned that companies should not take external investment just for the sake of it, and they should ask themselves if they are still able to operate even without the additional funding. “If not, that means you are not ready to take it,” he said.
“You have to make sure that you do all the basic things first, and when you are ready, there will be investors who will seek you out,” he added.
What can local brands do better?
According to Antonny, some of the brands may be facing challenges in their ability to maintain quality while scaling up. “Sometimes the brands face difficulties in securing a good supply chain (i.e. the materials/crafters), hence are limited in their scale. Or when they need to scale up, they find it hard to maintain the quality and resulting in a ‘too artisanal’ issue or spotty delivery, or price point[s] that are not friendly and hinder them from a larger market share,” he said.
Brands also can’t continue relying on their status as “local brand” or “heritage” or “culture” as their unique selling points. “Customers will not be loyal based on the heritage/local product angle only. Ultimately, [it] is the product and brand story that resonates with them that will keep them buying,” he said.
Angkasa’s view is that there is currently too much emphasis on ego - where the founders focus on creating products but ignoring the business side of things. “This is especially true for those who make great products. At the end of the day, the best business is a result of collaboration of the business side and the product artistic side.”
For Letterist, this means exiting its original product altogether. The company started out by providing calligraphy services, but after evaluating its direction, it had to make a hard decision to leave the calligraphy world as the market is too small. Letterist now focuses on selling notebooks for journaling.
Another change the company had to make is raising its prices. “Letterist is the most premium local-made notebook in Indonesia,” Chris said. “It's a strategic decision; we have to distance ourselves to our next cheapest available products. We have to make a very conscious effort to define who our competitor is, and how we can differentiate in our message.”
Finally, brands also need to realise the importance of the non-creative parts of business. “Accounting and taxes, for example; you can get somebody to do it, but you have to realise it’s important,” Chris said.