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Ep. 75 - The Growing Pains of SMBS and Ecommerce and How to Solve Them with David Koifman

David builds strategic partnerships that enable efficient acquisition channels and address the challenges faced by the growing CPG businesses using Kickfurther. 

Previously, David led a client-services team for a successful fintech company to a 100x increase in accounts. 

In This Conversation We Discuss:

  • [0:55] David’s background before Kickfurther
  • [2:35] The Ecommerce life cycle and the cashflow pinch that SMBs experience
  • [4:15] The question that had to be asked: If it works, what happens next?
  • [5:49] Finding money is challenging when you’re starting to grow
  • [8:06] Chase’s advice from Profit First by Mike Michalowicz
  • [8:51] Sponsor: Gorgias gorgias.link/honest 
  • [9:40] Crowdfunding is a great source of funding and testing product-market fit
  • [10:47] Chase recommending Crowdfunder and David recommending Shopify
  • [11:22] The telltale signs of a funding issue coming up
  • [14:24] Sponsor: Klaviyo klaviyo.com
  • [15:02] The funding problem isn’t unique to Ecommerce
  • [15:23] Different solutions to the funding problem
  • [17:24] Pick funding solutions that can work with other solutions
  • [18:04] What Kickfurther does to help SMBs
  • [20:19] How does Kickfurther make money?
  • [22:24] Sponsor: Postscript postscript.io/install
  • [22:54] Kickfurther gives more opportunity to individuals and small businesses
  • [23:32] Production is another problem that growing businesses face

Resources:

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Transcript:

David Koifman  

Understand how long it takes to produce your stuff, what fluctuations you may have, and add a little buffer.

 

Chase Clymer  

Welcome to Honest Ecommerce, where we're dedicated to cutting through the BS and finding actionable advice for online store owners. 

 

I'm your host Chase Clymer, and I believe running an online business does not have to be complicated or a guessing game. 

 

If you're struggling with scaling your sales, Electric Eye is here to help. To apply to work with us visit electriceye.io/connect to learn more. Now let's get on with the show.

 

Hey, everybody. Welcome back to another episode of Honest Ecommerce. I am your host, Chase Clymer coming to you from Columbus, Ohio. And way out in amazing Boulder, Colorado, welcome to the show, David Koifman.

 

Chase Clymer  

Hey, Chase. Thanks for having me this morning.

 

Chase Clymer  

Look, I got your name 30 seconds later. How great is that? 

 

David Koifman  

That is great. 

 

Chase Clymer  

Awesome. So David is joining us today. He is the VP of Business Development at Kickfurther. They help Ecommerce brands scale through a unique approach to finance. 

 

Before the show, he spilled a little bit of beans about what they're up to. And it's actually really interesting to me. And I didn't want to ask him any questions then, so I could ask them now. 

 

But before we get into that, let's talk about your history. What got you to this place in life? How'd you end up at Kickfurther? What's your story? What's your background?

 

David Koifman  

I started working in advertising and marketing. And then I had a unique opportunity to work for a financial technology startup here in Boulder. And then, [I] started as employee number 6. I watched the company grow to almost 100 employees.

 

 And it was a really cool experience. Mostly, just the building of the company and developing a product that was solving a problem for consumers. And [I] took that knowledge and experience. 

 

And then I met Sean De Clerq, our founder and CEO. And we had a good fit for that same trajectory to happen again with Kickfurther. And I joined the team. 

 

And after really digging into it and understanding how critical the problem is that we're now solving for these small and medium-sized businesses, I became pretty passionate about what we do and learned quite a bit about supply chain, Ecommerce, and the whole life cycle of producing and selling goods. 

 

Chase Clymer  

Absolutely. So, if we could dumb it down for people that are just getting into Ecommerce, what problem does Kickfurther solve? 

 

David Koifman  

Everybody getting into Ecommerce is selling something. And for Ecommerce, specifically, they're selling it online, either on their website or on a site like Amazon

 

But basically, they are either making or buying some sort of physical good, putting it in a warehouse, and then advertising it or somehow getting it out to an audience. 

 

And then those people are placing orders on their website or whatever website they're selling it on. And then they take that product, put it in a package, ship it out, and then the customer receives it. So that is the lifecycle from start to finish of Ecommerce business. 

 

Now, if you make this thing and it sells really well, then you have to go back to whoever made it for you or back to the raw materials suppliers and say "Hey, I need to buy more." 

 

And when that happens really quickly, all of a sudden, you're looking at hundreds of thousands of dollars that you need to spend to acquire products, and you're not receiving the revenues from the sales of that product until you pay the supplier. The supplier makes the product. 

 

Sometimes if it's overseas production, it's going to take a month to make it, and it's going to be on the water for a month, then it gets to your warehouse, and then you start selling it. And as you sell it, then you start seeing those cash flows. 

 

But most of the time, you need money to make more stuff before you've taken in all the money from selling the previous stuff. And this is a very common cash flow pinch that Ecommerce brands and small to medium-sized physical goods brands face in their growth. 

 

Chase Clymer  

Absolutely. That is actually on our side of the coin, from an agency’s perspective. It is a question that we ask all the time when people are about to start getting into paid media. 

 

We're like, "Hey if this works, what happens? Do you have the ability to sell more of this product? What's your lead time on that product? Can you find it?" It's a question that has to be asked. Everyone wants to jump in and hit the ground running and grow. And then this problem happens. 

 

David Koifman  

It's a symptom of success. And businesses find themselves in a really tight position where things are going really well and then all of a sudden, somebody like a Target or Walmart comes to them and says "Hey, we want to place an order that's bigger than anything you've ever made in the past. Can you do it?" 

 

And they have to sometimes say "No, we can't. We don't have the money to make it." And that's a really tough thing to turn down. 

 

Or if you're in Ecommerce and you're paying somebody to do marketing for you and they knock it out of the park, and you sell a bunch of stuff, and then you run out. And you have empty shelves, and people want to place orders, and you can't fulfill them. What we do is we help businesses fund that new production. 

 

There's a lot of places to find money. But when you're a small to medium-sized business, and you don't have a track record of being in business for five years with financials, banks, and other traditional sources of funding to look at, then it's actually a lot harder to find money and cost-effective solutions to solve this problem. 

 

Chase Clymer  

Yeah. I think one of the hardest things to do in Ecom or just being a small business is finding money that you're not going to A, get screwed over on the rates of that money, and B, like more traditional sources. It is a lot of work to build that trust. 

 

This is not financial advice. I really want to say that right now, because I'm going to get into some more specifics here in a second. Going to smaller banks is usually easier. You got friends and families. 

 

A lot of people you've probably heard about [are] doing a credit card game of jumping that stuff around. And all those are scary because you're personally liable. So knowing there [are] other solutions out there to get this stuff is something that I think you should be aware of. 

 

David Koifman  

Yeah, absolutely. And I think, if you have that network of friends and family who want to support your business, and you truly believe in what you're building, then that's a really good way to go because that money is very inexpensive. 

 

And as long as you don't find yourself in a position where you are unsuccessful and you're in debt to these people, and it becomes a personal issue, then that's definitely a good path to pursue. 

 

And as you mentioned, with the banks as well, if a bank will consider providing capital for you to help produce your inventory or whatever other costs you have to grow your business and it's definitely going to be the cheapest official source of funding that you can access. 

 

Only thing is, banks have a more traditional, more risk-averse underwriting and frequently will either not approve an early stage business or not give them nearly enough for what they need to produce inventory. Inventory is just like a really high-cost thing. 

 

It could be a quarter or half or even the entire amount you've already done in sales. So just say, my revenue is $500k and I need $500k to produce the next round of inventory, it seems like a pretty risky opportunity if you look at it from a traditional sense. 

 

Chase Clymer  

Absolutely. And then I think I spoke on this a bit when we were talking about you know how to build your financial system within your business on a podcast previously. The way that we run ours is based upon a book by Mike Michalowicz that I'm truly drawing a blank on now. Profit First! There we go, I need more coffee today. 

 

But in that episode, I talked about, you should really find a community bank. A bank that won't charge you fees. 

 

And then this is the best advice that we've ever gotten in my life, especially in the business world: You should start these relationships and establish credit with banks for your business when you do not need it. Because they won't give it to you when you do need it.

 

David Koifman  

Yeah, I couldn't give better advice myself.

 

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David Koifman  

I think understanding what your options are, and starting conversations, and establishing relationships and even taking on financing before you need it, is absolutely the best proactive measure. Because desperation is the worst way to find capital. 

 

Another thing that is... I don't know if the listeners here are pretty active on traditional crowdfunding like Kickstarter or Indiegogo, those are great ways to fund your first production run. And we dabbled in that area when we were just getting started. 

 

But now we only work with businesses that have proven supply chain and sales channels. So we don't do first production runs. But those are really good places to identify if consumers want what you're putting together. 

 

And then to be able to actually take the money that they raised in the crowdfunding campaign and put it towards production, and go through your supply chain and fulfillment process, is really a great experience to understand if you have everything ironed out or what changes you need to make to optimize it. 

 

Chase Clymer  

Oh, yeah. That's amazing advice. And then, for those of you that are thinking about doing this on Shopify, Kurt Elster, from The Unofficial Shopify Podcast, has an app called Crowdfunder that does this exact thing within the Shopify platform. So if this is something you're thinking about, I do highly recommend that app.

 

David Koifman  

Shopify is a really cool platform. Most of our customers, I would say, who are doing Ecommerce are using Shopify. We're not affiliated with them in any way, nor do we even have a partnership with them. But I just think it's a valuable solution if you're building your own Ecommerce business.

 

Chase Clymer  

Alright. So, I want to pivot forward a little bit. And let's talk about what are some of the signs --the leading indicators-- that this is probably going to become a problem for me? Like, I'm Joe. I've got this cool business selling these custom hats, what are some of the things that are gonna start happening? [What are] some leading indicators that this is gonna be an issue pretty soon?

 

David Koifman  

The biggest indicators are going to be an acceleration of sales. If you produce your inventory and it starts selling faster than you expected it to, that means you're gonna have to place your next order with your supplier sooner than you expected it to be. 

 

And it's going to be for a higher quantity, which means a higher dollar amount. Now, these are all good things. But this is going to be your first sign that you need to explore funding or make sure that you have the funds available to solve this problem because it's about to hit you. And it's good to be prepared. 

 

Another sign can be, if you start talking to wholesale buyers and they take an interest in your product because a lot of people start out in Ecommerce and they're just selling online. 

 

But then they're like, "Well, what if I could just double my sales by talking to one buyer?" If you're making some sort of outdoor product and you want to talk to REI, and they say "Yeah, let's do a test order." A test order is usually an indicator that a much, much bigger [thing] is coming. 

 

So if they place a test order, you better get ready to produce many times that quantity. If they're putting you in a few stores --this could be Target, Best Buy, any type of retailer-- they always start out with a test order. And if things go well with that, then you can expect the opportunity of a lifetime to come your way.

 

Chase Clymer  

Yeah, that's amazing advice, I hadn't even thought of it. If you're getting traction with your product, wholesalers will probably want to and that's going to be a big order. 

 

I think another thing would be if you are catching traction from any marketing efforts, or if you're starting an influencer campaign, or if you landed on Shark Tank, your world's about to explode. Those are all indicators right there. 

 

David Koifman  

Yeah. A lot of our customers have been on Shark Tank, and even if they don't take deals from the sharks, they still get this massive exposure through being televised. And their sales will skyrocket as a result of that. 

 

And sometimes those effects are long term. After that, you have the exposure that you need to just get to that next level. And all of a sudden, you're going to need funding to produce that next round of inventory and the subsequent one. 

 

A lot of our customers that have experienced that kind of growth are... They don't just come to us to bridge that next gap to the next production run. That's a problem that you're going to be facing for quite a long time as you grow. 

 

The revenue range of our clients ranges from $150,000 in sales in the last 12 months to upwards of $15 million. So, it's rare that somebody gets from A to B over the course of months. It usually takes years to get there. 

 

Chase Clymer  

Yeah, absolutely. 

 

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Chase Clymer  

It's any industry, it's not just ecommerce. I see this a lot in real estate. Finding financial partners to help you there is super hard. 

 

Anytime you start leveling up your business, you're probably going to be looking at a new partner that can afford bigger deals, or that can set more favorable terms. It's not just an Ecommerce problem. 

 

David Koifman  

Yeah. So did you want to talk about the different types of solutions, the different financing options to solve this problem? 

 

Chase Clymer  

Absolutely. Because I guarantee you know more about it than me.

 

David Koifman  

Yeah. So what I recommend when somebody comes to us is [to] do your research, understand what all your options are. So, we talked about friends and family, we talked about going to a bank. 

 

A bank will give you a line of credit, usually, or a small business loan. And then there is... You can go out to equity investors, who are going to buy a piece of your company for a dollar amount. That's also a great solution, particularly if they have resources to help you grow. If they have some way to help you distribute, or some sort of expertise in the product to help you with your production, reducing your production costs. 

 

Make sure that if you have an equity investor, that they're going to be able to bring some sort of value. And another thing that I would advise is don't use that capital for inventory. It becomes really expensive if you're going to grow and your valuation is going to go up using that money to produce inventories. 

 

Probably not the best advice and I don't know this, per se from experience other than hearing our clients come to us who have equity investors that say, "Hey, you should go out and find an inventory financing solution that's going to be the best way for us to grow together." 

 

Then you have solutions like... It's called a merchant cash advance. Kabbage, OnDeck, those types of solutions where basically it's a pretty high-interest offering where they then draw a percentage of your sales as it comes into your bank account. 

 

Chase Clymer  

I feel that that's essentially like... The big ones in this space will be Clearbanc and Shopify Capital, I believe as well. 

 

Chase Clymer  

Clearbanc and Shopify Capital are not... I don't think they're categorized under merchant cash advance. Those are solutions that I've heard a number of our clients using as well. And sometimes or oftentimes,  the faster the growth, the more help you're going to need. You're going to try to stack options together. 

 

Some of them conflict with each other where... Like if you go to a bank, they'll place a lien on all of your inventory and all of your assets and it becomes difficult to layer other financing solutions on top of that because that bank has the first position on everything. So that's another thing to keep in mind. Which solutions can coexist with each other? 

 

And so what Kickfurther does, the way that we structure our deals is using a consignment agreement. 

 

So basically a business is going to be placing an order with their manufacturer, their supplier, and they have let's say $100,000 worth of goods that they're producing, we would structure a deal for $100,000 and we actually are buying those goods. 

 

So the consignment agreement is we purchase the goods for you, and then we can sign them to you to sell on our behalf. So the cashflow pinch is truly addressed because when those goods are sold, that triggers the consignment, and then we invoice for those goods being sold. So you don't actually make any payments until your inventory that we paid for has sold. 

 

Chase Clymer  

Question. I sell widget A and I sell widget B and you guys are only giving me money for widget B and you're only going to invoice me when widget B sells even though widget A is my moneymaker? 

 

David Koifman  

Exactly. Or you could do a deal that is covering widget A and widget B. And what's really cool, after we establish a relationship with a business and go through our first deal is that we allow businesses to have overlapping deals because you have... Different widgets are produced with different suppliers and it takes different amounts of time to produce those widgets and then sells through those with. 

 

So maybe you're placing an order with supplier one for widget A. It's gonna take them a month to produce, a month on the water, and three months to sell. And then widget B it actually takes 3 months to produce and then you airfreight over, and then it's going to take you maybe 1 month to sell because that's a really fast-moving product. 

 

So to most effectively maximize your financing, you want to have 2 different deals for those 2 different production and sales cycles and we enable customers to do that. So once a customer does a deal with us, once they can have overlapping deals, and our average client is doing over 4 deals with us. So it really shows the value and cost-effectiveness of our solution. 

 

Chase Clymer  

Cool. I do want to talk about cost a bit if you could share. It's a consignment deal. You guys own the inventory until it sells. So that's how you're mitigating your risk, I'm assuming. How do you make money?

 

David Koifman  

So Kickfurther charges a 5% platform fee on every deal we do. So if we're doing you know that $100,000  deal, the example we came up with, then Kickfurther is going to charge a $5,000 fee to raise those funds. 

 

And the money comes from our community of backers. Over the last 5 years, we've pretty much exclusively, organically developed a community of people who want to support small and medium-sized businesses, and want to make money doing it. 

 

And so they participate in the consignment. When that $100,000 deal goes up on the website, 10,000 people who have signed up to receive these notifications about our deals will come to the website. First, they'll receive an email and then whoever is interested in this deal will come to the website, look at the details. 

 

And the business puts together a whole bunch of information that Kickfurther uses to vet them and establish if they're qualified to be on the platform. 

 

And then after that, the business will have a pretty concise, but thorough write up that the backers will be able to see and understand what are the risks that I believe this deal has in terms of supply chain and production, and sales. 

 

Chase Clymer  

That's cool. Yeah. You guys have a really interesting platform. 

 

David Koifman  

Yeah. And then so the business will offer a return to the backers. That'll range anywhere from 1% to 2% a month. So if you want to annualize that from a backer standpoint It could be 12% to 24% annualized return. We see an average of about 14% IRR across the backer portfolio. 

 

David Koifman  

Cool. So you guys are financing it on both sides. You're helping people grow wealth that they may have, and you're helping businesses grow as well by utilizing the connections on the other side.

 

David Koifman  

Yeah.

 

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David Koifman  

A lot of the solutions that we discussed just before this, those businesses are actually going to banks, and banks are giving them loans in order for them to provide the financing that they provide to the businesses. 

 

And banks get that money from account holders, people like you and me who have a savings account or a checking account. We're putting money in our bank and then that money is used for investments the bank makes with other businesses. 

 

So what we're doing is we're essentially cutting those banks out of the equation and allowing individuals to participate in consignment agreements and earn returns as a result.

 

Chase Clymer  

That's wild. I can't thank you enough for coming on the show today. I do have one last question for you before we jump off here, as someone that's working with growing businesses --every day essentially--- outside of financing, what do you think are some of the biggest challenges that you're seeing growing brands face and then like, Are there any unique ways that they're overcoming those?

 

David Koifman  

I think that one of the biggest challenges that these growing brands face is production, and production risks, and understanding the impact of changing your supply chain. So, some people will manufacture their first production run here in the US. Do a small batch, have eyes on the whole process. 

 

And then they'll say, "Oh. Well, if we go to China, our costs are going to be cut in half or even more." But it's a whole world that people don't understand what they're getting into. So what I would suggest is, do your research on whoever is producing your inventory. If you're switching to a new manufacturer, make sure that you trust them. Do your due diligence on them. 

 

A lot of our clients are actually traveling to meet them in person with whoever is going to be supplying their products. Some people are using brokers who have relationships with these factories and have a history with them and understand that when they say that it's going to be produced by this date, it's often a month or two months later. 

 

The real challenge comes in when you're making commitments to buyers, A buyer places an order, like a wholesale order, like we discussed with Target or Best Buy, and you agreed to deliver a product to them by a certain date. 

 

If you take that date and then bring it to a supplier and say, "Hey, I need to have this product ready by this date so I can have 30 days on the water and then a week or two to get it to you." And something goes wrong, you're going to miss that delivery date. And that's going to be the result of that is going to be either payment penalties or you're going to lose the order altogether. 

 

So there can be a lot of repercussions of having delays with your supply chain and not knowing what the fluctuations are within that process will very quickly lead to those problems. 

 

So understand how long it takes to produce your stuff, what fluctuations you may have, and add a little buffer. I couldn't stress that more. It's better to be early than to be late. Late is always bad. You either incur fees or you lose orders. So really have a good handle on [your] timeline. You can have delays in every part of the process.

 

Chase Clymer  

That's some sage advice right there. David, if they want to get a hold of you, what do they do? Where do they go?

 

David Koifman  

You can find me on LinkedIn. David Koifman. K-O-I-F-M-A-N. Or just email me, david@kickfurther.com. We'd love to talk to anybody who has a small or medium-sized business that's growing fast and looking for a funding solution or anybody who wants to participate as a backer on the platform and has any questions. Our website, kickfurther.com has a lot of great information on it. But feel free to contact me directly, as well. 

 

Chase Clymer  

Awesome. Thank you so much. 

 

David Koifman  

Thanks, Jason.

 

Chase Clymer  

I cannot thank our guests enough for coming on the show and sharing their journey and knowledge with us today. We've got a lot to think about and potentially add to our businesses. Links and more information will be available in the show notes as well. 

 

If anything in this podcast resonated with you and your business, feel free to reach out and learn more at electriceye.io/connect. Also, make sure you subscribe and leave an amazing review. Thank you!