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