Jamie Maynard, Capchase head of sales & BD chatted with Brian Sierakowski, GM of Baremetrics, and Joey Frasier, Co-founder & CEO of Worksuite Inc about Decoding financing for SaaS companies.
Watch the replay of the webinar, or read on to find out more about the different financing options for SaaS companies from bootstrapped startup to fully-funded, growth powerhouse.
First financing as a startup
Worksuite’s story is pretty similar to many startups in this space. When they started in 2015, the founders leveraged their own bank accounts and networks. They were lucky to have an angel investor in their network, and so brought in $500k that way.
As Brian pointed out, knowing people in your network who are willing to take a risk on investing in you can be a huge benefit that not every founder can leverage. Brian confirmed that in his first startup, he ended up bootstrapping for a long period of time, working a full-time job and then putting hours into the startup in the evening, which really hampered the growth.
In 2017, Worksuite brought in their first seed investment, and then in 2019 they had another round of funding using the same seed and angel investors. But by that point, they were really starting to see the dilution after each round ramp up, and that’s when they started searching for an alternative financing option that was non-dilutive.
Choose the right sources of capital at the right time
Once you’re generating revenue, it becomes easier to talk to VCs. Joey pointed out that it’s important to identify the right VCs to talk to, and understand what they’re looking for in terms of metrics, so that you don’t waste time on initial conversations.
Many VCs are looking for a minimum level of ARR, for example, and so there may be some VCs who you would only want to approach for later rounds of funding.
Jamie agreed, and explained that it’s important to go even deeper and consider the right sources of capital at the right time. Equity can be essential to getting a business off the ground before you have any metrics, and when you’re looking for funding to invest in initiatives that may not have near-term ROI.
Once the company is in growth mode and you’re looking to ramp up customer acquisition, then looking to exchange a piece of your company for funding may not be as attractive.
That’s where non-dilutive financing can come in, explains Jamie, and it can be really powerful. “Part of my initial conversation with any potential client is understanding their needs, what they plan to use proceeds for, and walking them through where Capchase could fit in with that. And that’s typically with growth initiatives that have known ROI.”
Consider your time-cost and the impact that has on growth
Going through months of fundraising can be seen as a rite of passage for founders, as they get their startup off the ground and ready to make money. But the impact of the number of hours involved creating pitch decks and networking can feel like a full-time job and take your focus off the work you need to be doing to grow your business.
When it comes to an angel investor, sometimes it's more about selling the dream. Once you’re ready to pitch to VCs, the amount of time spent courting investors is the same, but now they want huge amounts of data.
Beyond that, when you’re looking to bring on non-dilutive financing, funders like banks are often underwriting the quality of the VCs who’ve supported a business, as there are not sufficient assets in a tech-heavy company to give them confidence.
This was something that Capchase found frustrating — that SaaS companies that have solid growth and ARR can often be left out of the financing equation because what their offer doesn’t match what a funder has on their checklist.
Software businesses can have phenomenal metrics, fundamentally sound high gross margins, high customer retention, and lots of data that should give a lender confidence.
Working with people like Baremetrics and other analytic providers, Capchase realized that there is a lot of fantastic real-time data out there, and if it can be integrated into a financer’s platform, underwriting can happen in hours or days rather than weeks or months.
Offers can also be made based on the fundamental health and growth potential of a business and not just down to the luck of the angel or VC investors they sold portions of the business to as they were starting.
Metrics are key - from day one
While bootstrapping often means getting started with what you have and going back to perfect the process later, all the participants agreed that working on your metrics was key. “Have your accounting system from day one, your subscription systems set up as soon as you can. It means your data history is available as soon as you’re ready to consider non-dilutive financing,” explained Joey, and potentially much earlier than you would be able to obtain ‘traditional’ bank debt financing that is asset-based.
“It means you can get those three months of your life back,” explained Joey, referring to the time you might have spent talking to VCs.
Capchase, and many alternative funders, can have an underwriting decision made within hours or days once metrics are available, rather than the weeks or months it can take with more traditional options like bank debt or VC funding.
Have a plan for spending your funding - however you obtain it
When you raise money from a VC, it can feel overwhelming to explain how you’re going to use $1M or $2M over the next few years. There can often be a feeling of looking to obtain as much funding as you can, because the process takes so long, and it may be some time before you want to go through that process again (and dilute your business further).
As Brian pointed out, there is a risk that you take as much as you can, and then don’t need to use it all. And when you obtain VC funding, you don’t necessarily have to pay it back, but there is still an impact on your business, and that is the dilution of your ownership and what you could make by selling the business in the future.
With any kind of non-dilutive financing, you will have to pay the money back, and so that meant Joey focused more on what he wanted to use the money for and have a plan.
“With some providers, once you sign your name on the contract, whatever amount was listed there is funded from day one, and you need to start paying it back on day two. So if you’re not deploying it quickly on a planned investment, then it’s really expensive money,” explained Jamie.
Capchase offers dynamic financing, which means that while they will underwrite up to a percentage of your ARR, repayment terms only apply to any money that you actually draw down, from the date drawdown occurs.
That means you can agree to financing and not have to start repaying until you’re ready to deploy it. “We want to give the flexibility back to founders so they can draw programmatically when they want so that they can maximize their ROI on our capital,” explains Jamie.
“It’s really valuable that we can take the money in increments,” explains Joey. “We knew what we wanted to spend money on immediately as we agreed to financing with Capchase, and we got access to that small amount very quickly, with the ability to go back for more when we were ready, without having to renegotiate terms.
It gave us such a lot of agility and allows us to be very strategic about when we take funds and what we use them for.”
