Why Ethical Bedding turned down VCs and traditional lenders and chose flexible funding

Date
March 29, 2022
Category
Finance
Written by
James Higgins

When it came time to source capital for my eCommerce business, Ethical Bedding, I explored equity financers like venture capitalists and angel investors. The valuation was set. We began a round of SEIS funding in the UK (SEIS encourages investment in young companies by providing investors with income tax relief) and even worked to draw up all the legal paperwork. But ultimately, something just felt off.

At Ethical Bedding, we launched incredibly comfortable, luxurious bedding while developing the most sustainable organic fabric on the planet, and we did it by challenging the norms of how a business can and should operate. So when it came to funding, I decided to look beyond the usual options to find something that worked for my company.

I walked away from our SEIS raise and turned down loans from traditional lenders because the terms just didn't suit a high-growth business like mine.

I was undervaluing my company’s future by selling stakes to investors now

Anything I have to go chasing after, I’m not interested in. And anyone who comes after me with too hard of a sell, I’m not buying. I could secure funding from a VC or angel investor — but the price proved to be too high in more ways than one. I was shortchanging my company’s future at a point when I knew it had so much room to grow.

From my perspective, there were two important areas where equity financing was undervaluing our company:

  1. The future value of the brand: Technically, on paper, the company was overvalued for the price of the SEIS raise but would be undervalued in the future if we continued to grow (and we will). The valuation was set at £2.5 million for 6% ownership, but I knew in 12-18 months, it would be undervalued. The value of the brand is always going up and up and up, and I’d be knowingly giving those slices away now for less than they’ll be worth in the future.
  2. The steps that had already been taken to “de-risk” the business: Investors were technically coming in — and valuing the ownership shares — at the seed stage. But I personally de-risked the business already, so it wasn’t really at the seed stage or idea stage. I invested my own assets into building up inventory, funding our infrastructure, setting up working processes, and delivering on our brand promises.

Any time investors come in, there are other costs, too. They’ll want to see reporting. They’ll want data on what’s happening with your supply chain and to hear updates on your hiring. There’s extra legwork and outside accountability that comes with venture capital firms and angel investors. I decided that wasn’t the path I wanted to go down for Ethical Bedding. Not right now, anyway.

Traditional banks didn’t understand how to value a high-growth eCommerce business like mine

Traditional banks don’t have the modeling for — or even an interest in — partnering with high-growth eCommerce businesses or other companies that scale quickly. Approval is difficult, and the rates and terms aren’t friendly for eCommerce.

About five months ago, I tried the bank route myself. I applied for a loan, went through a super-clunky process, and when I was approved for a loan, I got awful rates. Why?

Their application processes and risk measures are still based on seeing incremental growth over longer periods of time. They want to see 12 months of accounts, proof of assets, and everything down on paper. Even if you can provide all that, the rates still won’t be good. As an eCommerce startup, your potential lies in your ability to scale quickly, but that’s a factor that traditional banks don’t weigh or assess.

Banks have their own risk measures to protect themselves (I worked in Credit Risk many moons ago!), and they have a set customer base that can meet their criteria, which is all fine. That’s how they choose to do their business. But those criteria often don’t align with high-growth opportunities, and a company like mine wasn’t getting the best terms from a traditional lender.

I worked in strategy for commercial UK banks, so I know how far behind they are in terms of having access to data and then understanding and using that information. The type of data that we could provide them as a fast-scaling business, they just wouldn’t know what to do with it. They’re beholden to their traditional measures and risk reviews instead, and it just doesn’t align with where the eCommerce industry is headed.

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I needed a flexible financing partner to scale alongside my company

I had other eCommerce businesses before and knew about revenue-based financing. I knew it was a strong opportunity for us because of the flexibility on remittance terms. But Wayflyer proved to be a true partner for scalable growth right away.

We sent out feelers to three or four different revenue-based financing providers, but we chose Wayflyer for three major reasons:

  1. Responsiveness and competitive rates: Wayflyer answered right away once we reached out, and I was very pleased with the rates we were offered.
  2. Flexible funding: I also knew that the flexibility of the offers and the possibility of reassessing terms could help us scale quickly.
  3. Depth of insights: The insights that Wayflyer could provide into our marketing performance and inventory trends would help us grow the business even faster.

From an inventory point of view, to launch a new color or line is quite expensive, and it can take a long time to get to market, so we need the space to constantly assess our budget as we figure out where best to spend our money. Flexible funding from revenue-based financing is the best option because it allows us to gradually expand as we learn and grow.

Flexible funding from revenue-based financing is the best option because it allows us to gradually expand as we learn and grow.

And it was also massively important to me to have a trusted partner that could grow and scale with the company. We’ve seen the depth of deep-dive insights that Wayflyer can provide from within Facebook; I can feed those directly to the team managing our Facebook ads. If the same level of insights are shared for Google, which they will be, I can then feed those back to my team, too.

At the moment, the budgets that we’re talking about might sound small. But let’s say we’re spending £30,000 on Facebook ads a month, we’re hovering around 2.0 ROAS (return on ad spend) on that, and we can get a 5% uplift from working with Wayflyer. The numbers actually get quite big pretty quickly once we’re spending £100,000-£200,000 across all platforms when you fast-forward 12-24 months. And that’s the uplift we can get from the detailed insights from Wayflyer as they scale up with us.

Trust your instincts when it comes to your funding

Trust your instincts about the funding options you have in front of you, whether VCs, angel investors, or even friends and family. You’re the one pouring hard work into your business, taking risks, and starting from zero to realize your vision. Don’t take funding just because other people tell you it’s the right or expected decision or because they want to get in while things are going well.

You’re the one pouring hard work into your business, taking risks, and starting from zero to realize your vision. Don’t take funding just because other people tell you it’s the right or expected decision or because they want to get in while things are going well.

Instead, seek out a partner that understands the unique battles of an eCommerce startup and a supporter that believes in your growth as strongly as you do. A flexible financing provider is ultimately worth much more than a creditor to be repaid or an investor to be appeased.

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Written by
James Higgins
James is the Founder and CEO of Ethical Bedding.

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