How To Get Funded (And Keep Investors On Your Side)

Author: Kunal KapoorFounder of The Luxury Closet

In less than 50 words:

  • Before starting a new venture, build your own credentials as a founder
  • Phase your implementation – the author shares his experience of The Luxury Closet (online retail)
  • Phase 1: Focus on customer retention & references from them
  • Phase 2: Think about expansion; fill gaps in internal processes; re-view unit costs

I knew from the early stage of my research and planning for The Luxury Closet that it had the potential to be a viable business, which could build up to become a multi-million dollar company- and shake up the luxury retail market in the process. Online luxury retail has been shaping up its own identity, heavily driven by digitally-connected millennials with a penchant for high-end brands, and new technology that enables them to exchange goods in a growing sharing economy. The Luxury Closet was the one to meet this market opportunity, by offering digitally savvy consumers a convenient, safe and customized online marketplace to sell and buy authentic, pre-owned personal luxury products.

But knowing this meant nothing. I had to prove it. Every entrepreneur knows what the steps are: create a compelling service, find and grow a customer base, build a great team, increase sales, set your growth milestones and hit them one by one. But sheer will and commitment alone don’t add up to a multi-million dollar company. There’s this little detail you can’t lose sight of: the growth of your startup is conditioned in every way by capital. In my case, I decided early on to get this via VC funding. My top priority was to identify, pursue, and secure the most relevant and beneficial investors for The Luxury Closet, and to convince them that my startup was the sure bet, the next hundred-million-dollar company they needed to invest in.

As the startup grows and matures as a business, how the money is raised and spent, and the types of investors brought in can make all the difference for its future path. All these Series A, B, C funding rounds are essentially stepping stones in the process of turning a startup into that industry changer, a multi-million-dollar company.

Seed capital: It’s how you get started

Raising seed capital from investors is a lot about trust. Many companies raise funding from a business plan, while some wait to have a prototype or basic initial traction. Nonetheless, what you have in your hand when you approach investors is initial groundwork on what could potentially be a large business. Thus the biggest factor by far that gets companies funded is the strength of the founding team. Investors need to trust that you will execute and build a large business. There is some basic research involved as well: how big is the market, how large are comparable global companies in the field, and if the model is scalable in terms of operations and the financial model.

When The Luxury Closet started, we went through a similar process. We had a business model, initial customer traction, and a site based on WordPress, all of which was backed by a sound plan on how the business could successfully scale. As a founder, I was able to convince our first investor Middle East Venture Partners (MEVP) that they could bet on me. I had a background in entrepreneurship, experience in sales management at Louis Vuitton, and an INSEAD MBA- and these factors certainly helped in getting MEVP on board.

Series A It’s all about optimization

Once the business proves it can grow, the next step is to build the foundation for scalability. At this stage, the startup needs to have a working model that is scalable and figure out where the growth will come from, i.e. will your core business expand with more users, will you diversify categories or markets, etc. It is also really important to think about your processes and technology that will enable you to operationally manage volumes. The investors involved in the Series A are usually institutional regional investors with a lot of experience in the tech and e-commerce world, so in addition to capital, the startup may also benefit from their collective expertise.

During our Series A funding, we were able to secure the backing of visionary investors who shaped the startup ecosystem in the region, such as Dubai Silicon Oasis Authority, twofour54, and MENA Venture Investments, while continuing to have the support of our seed investors, MEVP.

The most important milestone at this stage for us was customer traction, to keep the existing customers engaged and loyal, and expand the customer base simultaneously. It’s crucial to have a high returning customer base and a good return on customer acquisition over a time period that is within your investment horizon. We focused on making sure that each month over 50% of our revenues were generated from returning customers, and our acquisition costs were paid back within six months.

While investors are keen to get to know and give a lot of credit to the founding partners and the core team and their expertise, as the company grows, they want to be assured there is a team in place with the ability to carry out the operational plan and hit the milestones ahead. It’s vital to expand the team with a handful of capable, experienced people with complementary skills to fill in key roles, from technology and customer experience to marketing and finance. We had some sharp young talent who had joined our team in the early stages, and by the time of our Series A funding, they managed key operational tasks. A maverick CTO joined our team as well who built our technology stack, which was pivotal to move us to the next stage.

Series B It’s time to get all engines on

Now it’s time to really take the business to the next level! While Series B may appear similar to Series A in terms of growth objectives, processes and investor relations, everything is bigger and bolder. By this stage, it becomes clearer that the team can scale the business, the model is efficient and scalable, and that a large part of the market will adopt the product. It’s then the time to think about achieving much bigger scale, expanding into new countries, adding more product lines.

However, this period is also the time when some or most of your processes will show cracks, and they will have to be rethought. Costs become extremely important as servicing a larger volume can be very expensive, which is why you need to pay serious attention to unit costs for different processes.

Our business model has been optimized and we have proven traction with consumers. At present, The Luxury Closet has acquired over 300,000 members, and nearly half a million monthly visitors from around 60 countries, and designed the most personal and social shopping experience in the regional e-commerce space.

As for our team, we went out to find the best of the best for our key positions. The size of our team almost doubled in a matter of months, as we needed to have the right talent in place, well adjusted in their roles, across operations, tech, sales, customer support, marketing, to be able to accelerate our growth at the opportune moment. In October this year, we completed a US$7.8 million Series B round of funding, led by two of the region’s leading VCs, Wamda Capital and MEVP. This new capital fuels our engines as we’re preparing to enter Saudi Arabia.

Now, our focus is entirely on scaling up and expanding market reach, as this is the path for The Luxury Closet to reaching profitability and becoming a market leader. I hope to come back to Entrepreneur in one year for a tell-all.