Scaling Success: Navigating Ecommerce Growth Challenges

Welcome to Propeller Perspectives, a monthly newsletter focused on sharing expert industry knowledge from the top strategic finance and accounting partner for venture-stage companies. In this month's newsletter, Propeller CFO and Ecommerce Practice Area Lead Anthony Rosen, delves into the challenges his clients have encountered as they've expanded, with some now operating as billion-dollar enterprises. Join us to discover how he guides them through these hurdles!

April 2024 Newsletter with Anthony Rosen - Propeller CFO

When you sit down with a founder, do you have a series of items that experience has taught you to dive into first?

AR: I mainly work with ecommerce companies. It’s been a wild ride in the ecommerce world lately, so I like to hear about a company’s journey, especially how long they’ve been in the game. Why did the founder start it all? I love digging into their goals, mission, and what they did before this gig. Some founders are all about raising tons of cash and aiming for that billion-dollar dream, while others are more chill and prefer a lean, bootstrap vibe.?

Knowing where they are on this scale helps me give tailored financial advice over time. And of course, I must know early on how they’re doing cash-wise. It’s all about making sure they’ve got enough cash flow and runway. Every company’s cash situation is different, and that info is key for our planning chats.?

What are the three biggest challenges that surprise ecommerce founders that you see from your seat as a fractional CFO? What aren't they expecting?

AR: I've found that in the world of ecommerce, there are plenty of surprises waiting for founders. Having worked with over 50 brands in the past five to six years, I've come to see just how invaluable that experience is when advising and collaborating with them.?

One big surprise for ecommerce founders is underestimating the capital needed to kick-start their business. Unlike software-as-a-service (SaaS) ventures that mainly require people and digital assets, ecommerce involves tangible products and inventory. This often means substantial upfront costs, from long lead times to necessary deposits and working capital cycles. That's why I always encourage startups to aim for a bit more funding during their fundraising rounds—it helps cushion the inventory needs and covers unexpected expenses that inevitably crop up.?

The second eye-opener is the operational complexity, especially for Omni-channel businesses. Many companies nowadays aren’t just selling on their websites but also through platforms like Amazon or even brick-and-mortar stores. Managing logistics, ensuring the right products reach the right customers, and juggling the supply chain and working capital cycles become intricate tasks. With high transaction volumes, varying margin structures, and different operational demands across channels, it’s a whole different ball game.?

Lastly, compliance issues can catch founders off guard. From sales tax and 1099s to Delaware franchise taxes and HR regulations, there’s a myriad of administrative tasks to tackle. In smaller setups, you don’t often have dedicated personnel for these roles, so external advisors become crucial. Drawing from our experience, we help businesses navigate these compliance challenges smoothly.?

When should an ecommerce company invest in client success or a customer experience team?

AR: In the ecommerce world, nailing customer service is key—it’s like the client success equivalent for SaaS businesses. Keeping customers happy, coming back, and leaving rave reviews is a game-changer for growth.?

What’s neat is that it doesn’t have to break the bank. You can start small with just a couple of dedicated team members. Plus, outsourcing to places like the Philippines can give you top-notch service without the hefty price tag. Even big players making serious revenue often outsource their support teams.?

For software needs, tools like Zendesk are lifesavers. Keep that email flow smooth and respond promptly—it’s a must in today’s game. Good customer service isn’t just a bonus anymore—it’s expected. But the upside is, it’s an investment that doesn’t have to drain your resources.?

What significant challenges did your large clients face in the time you worked with them?

AR: I've had the privilege of working with a few clients who have now become billion-dollar public companies. I started collaborating with them when they were at their launch phase, essentially as $10 million enterprises. Over the years, as they scaled up, they encountered unique challenges typical of that growth trajectory.?

One major challenge they faced was customer acquisition. In the ecommerce realm, acquiring customers can be quite costly—it’s an investment. These clients raised significant venture capital and private equity funding to fuel their growth. In the ecommerce landscape, this kind of fundraising is often essential for reaching substantial scale. Assisting them in navigating these fundraising challenges, ensuring they had robust financials and reporting for investors, was a crucial aspect of our partnership.?

Additionally, compliance was another significant factor. Given the complexities of a relatively new industry, there were intricacies around accounting and regulatory environments, especially with multiple entities and intercompany transactions. Guiding them through this maze and ensuring accurate financials not only satisfied investors but also met compliance requirements and supported their tax strategies.?

Another critical aspect was helping these companies determine the right time to bring finance functions in-house. While Propeller scaled effectively with them up to hundreds of millions in revenue, they eventually needed dedicated internal finance and accounting teams. We supported them in deciding when to make these hires, defining the org structure, crafting job descriptions, and even assisting in the interview process for roles like VP of Finance or Controller. This transition from fractional CFO to an in-house finance team is an important journey, and it's something we carefully navigated with our larger clients.?

How do you guide founders and CEOs around their sales and marketing expenses???

AR: Guiding ecommerce founders in managing their sales and marketing expenses is crucial, considering it often ranks as one of the largest expenditure items after the cost of goods sold (COGS). On average, companies allocate anywhere from 20% to 50% of their revenue towards sales, marketing, and customer acquisition/retention efforts. Thus, it's essential to determine where the company stands on the spectrum between growth targets and profitability goals.?

The first step in our discussions is pinpointing the right spending threshold, recognizing that there's no one-size-fits-all approach to sales and marketing budgets. This decision hinges on the company's objectives—are they prioritizing top-line growth, do they have ample capital for aggressive marketing, or are they aiming for profitability, necessitating a more conservative spending approach? By delving into key metrics such as customer acquisition cost (CAC), average order value (AOV), repeat purchase rates, lifetime value (LTV), and return on ad spend (ROAS), we gain insights into spending efficiency.?

Monitoring these metrics on a regular basis—daily, weekly, monthly—allows us to gauge spending effectiveness and make timely adjustments. Flexibility is a strength of marketing spend; it can be ramped up or scaled back swiftly based on performance. Deciding whether to handle these functions in-house or through agencies is another consideration, with each path offering its own advantages based on the company's specific needs and the founder's preferences.?

Ultimately, there's no definitive right or wrong approach; it's about finding the strategy that aligns best with the company's goals and resources.?

Are there balance sheet challenges unique to ecommerce brands that oftentimes founders aren't are unaware of when they first come on board when they first launch their companies?

AR: One of the most significant balance sheet challenges faced by ecommerce companies revolves around working capital, particularly concerning inventory management. While accounts receivable (AR) typically isn’t a major concern unless dealing with Omni-channel sales to larger retailers like Target or Walmart—where understanding payment terms becomes crucial—working with bill.com for accounts payable (AP) is relatively straightforward.?

However, the real complexity arises with inventory. Accurately reflecting inventory on the balance sheet and forecasting future needs pose significant challenges. This complexity stems from dealing with various suppliers operating on different payment terms, including deposits, 30- or 60-day terms, as well as transit times for goods in transit. Additionally, inventory might be invoiced but still in transit, whether by sea or air, leading to nuanced accounting requirements.?

To tackle these challenges effectively, we collaborate closely with our clients’ operations (OPS) teams. Establishing robust processes, such as utilizing shared documents for monthly reconciliation, is vital for obtaining accurate inventory balances. It’s crucial to account for all inventory components, from raw materials to finished goods, including associated costs like product COGS, inbound freight COGS, and packaging COGS.?

A common issue we encounter is clients using cash accounting methods for inventory purchases, which can lead to inaccurate margin analysis and financial reporting. Transitioning to accrual accounting for inventory and COGS is often one of our initial tasks. This shift not only aligns with proper GAAP accounting standards but also provides a more comprehensive view of financial health, essential for investor relations and board reporting. Establishing these robust accounting practices is key to ensuring accurate financial reporting and informed decision-making.?

How do you lead founders through a conversation about how much to raise??

AR: One of the initial considerations I discuss with founders is determining the amount of capital they need to raise. This discussion often forms a crucial part of my conversations with clients and entrepreneurs. Many founders first underestimate their funding requirements, assuming they'll need less than they do. Creating a budget model, typically a two to three-year forecast, becomes a priority to address this question accurately.?

A robust budget model helps in understanding various aspects such as cash runway, profitability status, and the funding needed to sustain operations. Another key factor in determining fundraising goals is identifying where the company stands on the growth-versus-profitability spectrum. High-growth ventures necessitate more substantial funding, especially for customer acquisition, while leaner, more profit-focused approaches require less capital.?

Additionally, we delve into the ultimate endgame for the company. Are they aiming for a significant exit, possibly through acquisition by a VC, private equity firm, or going public? Or are they looking at a more modest exit strategy, growing to a certain revenue threshold before considering an exit? Understanding the founder's comfort level, goals, and aspirations helps tailor the fundraising strategy accordingly and plays a vital role in shaping our discussions.?

Ready to see how Propeller can help scale your growing business? Book time with one of our CFO experts today: https://lnkd.in/gMC9EZrj