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A Step Ahead: How to Choose a Retail Venture Funding Model to Finance Your Innovation Projects

Specno

Pros, cons and 7 ways to de-risk innovation projects – how to choose the retail venture funding model that’s best for your business

How many new innovation projects are you rolling out right now?

As we’ve shown before, competition is fierce with 57% of retailers investing heavily in innovative new tech as 2023’s $6.3 trillion e-commerce market looks set to hit $8.1 trillion in 2024.

Right now, investing in advanced retail technology and omnichannel capabilities is crucial for e-commerce and staying relevant in the future of retail.

The question, however, is: how do you afford to invest in all this new tech?

Well, as we’ve also shown recently, your company doesn’t need to bear the full cost, you can get creative with a suite of venture funding models for retail.

Now, we show you how to choose a retail venture funding model that’s right for your company.

Wait, Why Use External Funding?

The sheer pace and scale at which retailers are converting to omnichannel is staggering. Did you know that 9 out of the top 10 e-commerce players are tech companies, not retailers? 

This indicates they have a completely different method of operation than your traditional retailer or e-commerce operator. Keeping up with their pace means a lot of experimentation and innovation, which requires funding.

And these funding methods are tools that anyone in retail and e-commerce can use to de-risk and fund more innovation projects, faster.

How to Choose a Retail Venture Funding Model

We look at the pros and cons of each funding model and then give guidance on whether it’s right for your retail innovation projects.

1. Reallocating Resources

This option involves adjusting your current budget to redirect funds towards new projects. By evaluating existing expenditures and income streams, businesses can identify areas where costs can be cut or optimised to free up capital.

Pros

  • Full Control: Maintains autonomy over the project without incurring debt or diluting ownership.
  • Cost Efficiency: Encourages a thorough audit of current expenses, potentially uncovering long-term savings beyond the immediate project.

Cons

  • Limited Funds: You may not always be able to free up sufficient capital for ambitious projects, limiting scope or quality.
  • Opportunity Cost: Reallocating funds can mean pausing or scaling back other initiatives.

Choosing the Resource Reallocation Model

This funding model is best for small to medium-sized innovation projects. As you well know, it’s extremely dangerous to divert funds from a business with stable cash flow without jeopardising operational efficiency.

So it’s best to keep this one for small-scale projects. Perhaps consider only funding the MVP and early-stage testing of new ideas this way. Then, when you have winning ideas, you can use a different model to fund the full roll-out.

See how to unlock the best of omnichannel with integrated online and offline channels.

2. Venture Capital (VC) and Corporate Venture Capital (CVC)

VCs and CVCs are professional investors who provide capital in exchange for equity, or ownership stakes. It’s how many new tech companies are financed. 

Pros

  • Significant Funding: You can access substantial capital for large-scale projects this way.
  • Business Expertise and Network: The investors themselves offer access to their own wealth of knowledge, industry connections, and potential customers.

Cons

  • Equity Loss: Dilutes ownership of your company or the entity running the innovation project, potentially reducing control over business decisions.
  • Pressure and Expectations: Investors seek high returns, possibly pushing the project in directions that prioritize profitability over other values.

Choosing the CVC Funding Model

This is perhaps best suited for high-growth potential projects, where the rewards are so big you’re willing to trade equity for rapid expansion. It’s not for small projects; those who use VC funding normally have a very clear exit strategy – so going this route requires it tying in with your company’s long-term goals.

See how to innovate in retail with this MVP method for e-commerce.

3. Government Grants and Subsidies

These are funds provided by government agencies or non-profit organisations to support businesses in various sectors, often focusing on innovation, research, and development. Grants and subsidies are typically non-repayable, so they’re an attractive option. However, they often come with specific criteria and reporting requirements.

Pros

  • Non-repayable: Possibly the most attractive drawing card, this model provides financial support without the obligation to repay, reducing your financial burden.
  • Credibility and Public Relations: Being selected for a grant can enhance business reputation and open doors to further opportunities.

Cons

  • Competitive and Time-consuming: Application processes are often rigorous, with no guaranteed success.
  • Use Restrictions: Funds typically come with strict guidelines on how they can be used, limiting flexibility.

Choosing the Grants/Subsidies Model

This route is ideal for projects that align with your government’s or non-profit’s objectives and often require that your research and development project include some advances in social innovation. Qualifying for these is tough because you need to very strongly align with specific external grant criteria.

This is perhaps best suited for innovation projects that have a direct and demonstrable socio-economic benefit. This is still possible if you can find some way to amalgamate your innovation needs with your corporate social responsibility efforts. 

In South Africa, for example, the DTI offers a range of tech funding instruments.

4. Strategic Partnerships

Forming partnerships with other companies, tech firms, startups or other industry players to jointly develop or fund a project means you share resources, expertise, and networks to achieve mutual benefits. If you need to innovate in a specific area in your e-commerce space, for example, partnering with a startup that’s building the exact thing you’re looking for can be a very effective way to get the tech you need.

Pros

  • Shared Risk and Resources: Partners contribute expertise, technology, or capital, reducing the financial burden and spreading risk.
  • Market Access: Partners can offer access to new markets, customer bases, and distribution channels.

Cons

  • Complex Negotiations: Establishing terms that benefit all parties can be challenging.
  • Potential for Conflict: Differences in vision, culture, or business practices can lead to conflicts.

Choosing the Strategic Partnership Model

This is such a great option, it’s surprising that more corporates don’t have armies of startups building all their tech for them. That said, this route works best if you have a clear synergy with potential partners, offering mutually beneficial outcomes. It requires strong relationship management skills and clear legal agreements.

See how data boosts customer loyalty.

5. Debt Financing: Bank Loans and Line of Credit

This traditional financing method involves borrowing money from a financial institution and then repaying it over time. This can take the form of bank loans, lines of credit, and other lending products.

Pros

  • Ownership Retention: This route allows you to keep full control of your innovation projects, unlike equity financing.
  • Tax Benefits: Interest payments on debt can be tax-deductible, reducing the n

Cons

  • Repayment Obligations: Requires regular repayments regardless of business performance, which can strain cash flow. The risk is also all yours, as you have to repay the loan whether your project is successful or not.
  • Collateral Requirement: Loans often require collateral, posing a risk to business assets.

Choosing the Line of Credit Model

This is suitable if your business has stable cash flow and you are very confident you can repay the debt. Naturally, this can be an attractive option if you’re very confident in the project, and you know you will make much more money from it than the repayment amount.]

Discover retail app features for personalised journeys.

6. Product Pre-Sales

This is when you pre-sell a product or service before it is completed or launched, to raise the funds for its development. It’s like do with games and music; not commonly in retail, but still an option.

Pros

  • Immediate Cash Flow: Provides funding before the product launch, easing cash flow constraints.
  • Market Validation: Pre-sales can serve as proof of demand, reducing market risk.

Cons

  • Customer Expectations: This naturally creates an obligation to deliver, potentially stressing production and delivery systems.
  • Limited to Certain Products: Not all products or services are suitable for pre-sales, especially those requiring long development times.

Choosing the Pre-Sales Model

This method works well for products with clear and established market demand – Taylor Swift fans will pay for her new album before it’s launched. In retail, though, this will require remarkable planning and organisation to execute. That said, it wouldn’t be surprising if a company like Amazon tried it.

Learn how to grow your users in e-commerce.

7. Revenue-Based Financing

A funding model where investors provide capital in exchange for a percentage of future revenues. It’s related to VC funding, but instead of giving up equity you simply agree to share a portion of the profits with the investor(s).

Pros

  • Aligns Investor and Business Interests: Repayments are tied to revenue, which means you only pay when you are also making money.
  • No Equity Loss: Allows you to retain full control of your business.

Cons

  • Costlier Over Time: Depending on the agreement, this can be more expensive over the long term than traditional loans, if the project generates significant revenue.
  • Revenue Commitment: You commit to foregoing a portion of your revenue, so it’s vital to crunch the numbers and ensure it doesn’t impact your cash flow down the line.

Choosing the Revenue-Sharing Model

This is very attractive and highly suitable for projects with clear revenue generation potential post-launch. It’s ideal for when you need to retain control over your project and allows you to launch and share the risk with a partner/investor.

Need help with a retail innovation project?

Let our team of technology consultants help you make good decisions.

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