On August 8, Nini Zhang, VP of Investment Banking and Capital Markets – Retail and Consumer at Credit Suisse, hosted a conversation on how brands should approach investment opportunities today.

Zhang shared a brief overview of the current market landscape: the U.S. has an exuberant market which is at all-time high; investments are still up and customer confidence is at an all-time high.  On the other hand, some retailers are facing some structural challenges and with declining mall traffic, it is not a perfect environment for retail.  So what are investors looking for today?

• Investors are looking for growth opportunities in brands that have differentiation within the oversaturated market. Brands of particular investment interest have an underlying technology that will help enable growth.
• Venture capitalists and private equity are looking at entrepreneurs who have technology infrastructure versus an established company to invest in.
• A lot of investors have been apprehensive about investing in companies that rely on retail as their main point of sales and revenue due to the recent hardships within the retail industry.

Assessing your need for funding

The type of funding and need will depend on your end goal.  If you want to grow without handing over control and becoming beholden to the demands of a venture capitalist, it requires a different pool of investors than if you are looking to become the next Warby Parker.

Zhang’s general philosophy is “only fund when you need to.”  The first matter to consider before approaching investment is how to build the best and most sustainable business with what you have.   Consider what milestone you are trying to reach and the amount of cash you are spending each month –that will help determine the funding your need.  Additionally, Zhang stresses to only raise as much as you need to get to that milestone.

Forms of Investment:  Equity versus Debt

The decision should be made based on whether you only need capital, or if you also require an additional piece such as business expertise.

Equity investment

• Venture Capitalist: Are looking for brands that are growing over 20 percent a year and are typically looking for explosive growth out the door. VCs are pressured to deliver investment back to lenders in a specific amount of time, so they are more demanding.
• Private Equity: They will typically buy out an entire company. A brand should already be profitable or at least at break even. They will scrutinize how your business generates cash.  A typical expectation is a 20 percent return on investment over five years.
• Family Office: One high net worth individual or a pool of high net worth individuals who have come together to establish a fund. They are typically smaller structures and usually have a permanent capital base.  These investments are not under the pressure of time.  For fashion businesses, these tend to be the better structure because it’s a longer-term view on capital.  They tend to be generalists and may not be able to offer operational expertise.
• Angel Investors: Although it is difficult to find angel investors, they tend to be individuals who have deep experience in a particular sector, are independently wealthy, and have invested in an area before. There is no public list of angel investor one can reference; these individuals are found through your personal and professionals networks.

Debt investment

• Debt to fund working capital: line of credit which funds day-to-day operations
• Debt to fund Growth: straight debt, similar to that of a mortgage. Your business must be cash flow positive to sustain the interest payments and you have to be able to pay the debt loan in its entirety when it is due.
• Convertible debt: usually a short term debt instrument. You receive money up front and won’t have to pay interest. At a defined point in the future, the debt then becomes equity.  Interest still accrues over time even though you aren’t paying with cash; you are paying it with the equity you are giving up.

Business Valuation

Valuation is in some sense arbitrary as it’s based on how much money you need and how much of your company you are willing to give up. Additionally, your intrinsic value may be very different from where the public versus private market values you. Traditionally, valuation depends on the stage of your business, how much operating history you have, and the ability to project your business forward over time.  You can think of value, when in a Series A or initial seed investment phase, in terms of the following: ”if you want to sell 10 percent of your company and need $1 million, the company would be valued at $10 million.” Be mindful that the first round of investment you raise will set the bar for the any future investment rounds.

For CFDA Members that are interested in learning more about the Investment Series Program, please email Sacha Brown S.Brown@CFDA.com