May 23, 2022

How we think about Risk at Capchase

As we underwrite companies for funding from Capchase, we’re essentially looking for a long-term partnership in which our goals and our client’s goals are aligned. Learn more about what we mean.
How we think about Risk at Capchase

While the Oxford dictionary defines risk as “a chance or possibility of danger, loss, injury or other adverse consequences,” at Capchase, we have a different take on Risk. After all, working with SaaS businesses, we know that risk is inherently part of the equation. The way we think about it, risk is whatever prevents a founder from achieving their long-term goals. A client that is not moving towards their ultimate goal, is generally a risky client. In this post, I’ll try to explain what we mean by that.

Every founder has an end state of the world in mind when they set out on their entrepreneurial journey. As explained by our founder Miguel Fernandez, founders on that journey need to be expending all their energy on their core competency, while partnering with vendors and companies that can help remove obstacles on non-key initiatives. Capchase is on a mission to help growing SaaS companies with capital and insights - the idea being that the startup team should continue to reduce Risk for themselves by focusing on their core competency and long-term goals.

As we underwrite companies for funding from Capchase, we’re essentially looking for a long-term partnership in which our goals and our client’s goals are aligned. Since our client’s long-term success is determined by how good they are at what they do, the metrics that we look at are aligned with that perspective. We like companies that are post product-market fit, have come up with a business model that leads to strong unit economics (LTV/CAC, gross margin), and have traction in the market (high retention, low churn). These are simple fundamentals that sometimes get forgotten in the frenzy of a hyper-growth, competitive environment, but as normalcy returns to the startup world with a focus on fundamentals, our belief is reaffirmed that taking a long view of a client’s business ensures good outcomes for everyone in this partnership.

What we look for in SaaS companies

Specifically, below are some characteristics that we look for in prospects that we underwrite:

  • Having a specific use case for the funding that they are seeking from Capchase and a history (however short) of delivering returns by efficiently deploying capital.
  • Being conscious of unit economics from day 1 (high LTV/CAC, high gross margin, low churn, and high retention). While unit economics can be improved over time, some things are built into the business model - for example, it’s incredibly hard to improve gross margins over time. We like companies with strong customer cohort performance and leadership (both with SaaS and SaaS-like companies) since those companies tend to have a higher likelihood of having good unit economics.
  • Being conscious of the macro-environment that they are operating in. Great companies use good times to their advantage to arm themselves with the funding required to get through a slowdown, and in a slowdown, are cautious of their cash flow.
  • Related to the previous point - having optionality in how they operate: While the majority of the companies we work with are unprofitable or cash flow negative, there is a distinction between clients that are going to be viable long term and the ones that are going to struggle materially in tough times. Something that the banks and other traditional lenders haven’t wrapped their heads around is that successful startups are unprofitable by choice: they are usually making a trade-off between growth and profitability → and if the times call for it, they have the ability to cut costs and become profitable. This optionality gives them leverage when they have to raise funding, whether from VCs or from us, and we like companies who have this optionality. Also note: that optionality is correlated with good unit economics - clients with good unit economics will also tend to have optionality.
  • While we love growing companies, this criterion is intentionally listed towards the bottom. This is because, during good times, it’s easy to “manufacture” growth by spending large amounts to acquire customers with low retention and poor unit economics. We like to see growth, but it becomes a relevant criterion only when many of the other traits mentioned above are met.
  • Lastly, there are founders out there who may not know the terminology - LTV/CAC, gross margin, retention, etc. - but have a good handle on their business, and know that they are delivering real value to their customers. These are the clients we enjoy working the most with - because it’s much easier to familiarize them with the metrics and relay back what we like and where we would like to see improvement, versus working with a client who may know all the financial jargon but have a flawed business model.

If a company meets the above criteria, they are likely a good partner for Capchase

The effects of the current macro environment

While the current environment may seem like a “sky is falling” moment for the startup world, we haven’t changed our perspective on companies that meet the criteria listed above. The VC world may have changed significantly in the last 5 months, leading to talks of delayed funding rounds, or in the worst case, a down round. However, for companies that meet the criteria above, the product and terms that we would have offered in December ‘21 are still the same in May ‘22.

The most important thing for such companies is to continue to a) focus on the fundamentals - good unit economics, sustainable growth, disciplined spending, and b) cut through the noise, and your business will be in great shape coming out of this slowdown. David Sacks at Craft Ventures has a helpful framework to think about this here.

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What you can expect when you start working with Capchase

Our work with our clients starts with the first interaction that they have with us - whether it be through an account executive (AE), or directly reaching out to us through our website. We like to understand what your long-term plans for the business are, and what role Capchase could play in it. Since we have access to your financial data, you’re getting into a partnership where you will get honest feedback on what you’re doing well compared to where you need to improve.

Since the things that we’re looking for are also important for your success as a company, we can guide you on when it makes sense for you to get Capchase funding (the answer may be no, or not yet!), and how much. Our goal is to add value to any company that reaches out to us. As part of that mission, we can provide an assessment, and an AE can help you think through the next 6-12 months of your growth journey, and where all you may need capital. The following are the various elements of partnership with Capchase:

Capital

We will formulate a capital plan that includes the following:

  1. The most efficient use of funding from Capchase
  2. A dynamic approach to funding so that you can get “just-in-time” funding without incurring prohibitive fees or additional cost of borrowing large amounts upfront which can’t be immediately deployed.

Insights

  1. After we start working with you, a dedicated Growth Advisor will continue to revisit the capital plan with you on a monthly basis to support your growth and capital planning.
  2. We provide a benchmark report to every company that we have an interaction with. This report allows you to compare your metrics with the best-in-class for your size, domain, and business model.
  3. We list the areas of strength and opportunity for your business.

Community

  1. After your first interaction with Capchase, you’re part of a community of founders that are trying to solve similar challenges.
  2. You can build relationships with this community of founders through one of our many events both online and our in-person ‘NightCap’ events happening all around the globe monthly
  3. Our Growth Advisors are invested in looking out for your best interests and providing their expertise in every way they can. During your journey with Capchase, your Growth Advisor will probably become your favorite person with whom you do business.

The various elements of partnership with Capchase

As they say, if the only thing that you’re getting from your VC is money, it’s likely very expensive equity. On similar lines, if the only thing that you’re getting from your financing provider is debt, you’re not deriving the most value out of them. At Capchase, we like to reduce Risk for ourselves, and for our clients, by forging a long-term partnership where money is only one of the variables.