How has fundraising changed in the last few years?
1. COVID introduced founders to fundraising strategies they hadn’t used before
COVID had an interesting effect on fundraising trends, because of the government subsidies that became available for founders. Governments were giving payroll protection loans to founders, like EEID loans or PPP loans. It meant that founders started to use other financing sources beyond either bootstrapping or VC. And suddenly they saw that debt was a form of funds that actually served their purpose as well.
A lot of companies used debt for the first time as a result of the subsidies that the government gave them to cope better with COVID. That’s the start of a whole generation of founders now used to working with debt, who have found they can use this money to grow and to extend runway.
2. The API economy has evolved
The API economy has also developed massively in the last three to four years. Suddenly it is much easier to analyze a company in real time, to understand their metrics by connecting through APIs in one click. This is replacing a process that usually took a long time: sharing Excel documents, multiple PDFs and several calls. This is key for fundraising and financing. Now it’s possible for founders to connect their data sources to the finance provider in three or four clicks. It means that finance providers can understand the status of a company and their future at a minimum effort for both parties.
3. An increase in second, third and fourth time founders
Another phenomenon is at work as well. There are more and more second, third and fourth time founders. First time founders are usually focused on growing the startup at whatever cost possible. And usually, when they make the first exit, they suddenly see that all their effort in all those years has only resulted in an ownership of, let's say, between five to 15% of the company at exit. So you see second, third, fourth time founders focus on operating in a way that lets them optimize for less dilution.. They know the playbook of how to grow a company. And now they know that there are many ways in which you can grow the company at the same speed without selling so much of it along the way. This has created a massive movement where experienced founders are looking to use different types of funding, to avoid selling big chunks of the company to investors.
What are the options for raising capital?
You bootstrap: you use your own money and that's all the equity in the business. It’s a valid option. You keep a hundred percent of the ownership, and you don't have to report to anybody. The cons are, of course, that you can only reinvest the cash flows that you get from the company into the company to grow. So usually, the growth profile looks almost like a flat slope, for many years. And then as those cash flows start accumulating, you finally start to grow and grow - and then it becomes exponential. But that slow pace and the wait for high levels of success can be difficult for founders.
And now we come to the dilutive options:
Angel investors are usually ex-operators: often people that know about your industry and are excited that they can help with connections and advice.
Then the second dilutive option would be VCs: investors that are going to buy a large portion of your company. They usually put a lot of protections into the company to protect their stake. And in the best case scenario, they also bring you valuable connections, introduce you to customers and attract talent. They also can give you advice, because they have portfolios: so they can see what works and what doesn't, they can see the patterns. But in the worst case scenario, you have VCs give you money and then expect you to run the company according to them. This can be a real irritant and blocker to founders.
A slightly different option would be crowd funding, where you are selling smaller but higher numbers of pieces of the company to many individuals. Depending on the country, you have more regulation, friendly options versus not, but you know, like it's also a way of getting money from a bunch of retail investors and usually like no strings of tasked in a sense in which you don't have to report to anybody. Right. So that's like equity, the universe of equity.
In the universe of non-equity options, you have government subsidies and then various forms of debt:
1. Government subsidies
Relevant government subsidies exist in nearly every country in North America and Europe. They could be credits that are paid at a really low cost over a very long time, or. R&D tax redemptions, where you get back some of the money that you spend on R and D.
2. Venture debt
You have venture debt, which is usually long term dollars that you get from a bank or a lending institution. You pay over 12 to 48 months, typically. And usually there is some kind of interest-only period. After that, you’re paying interest fees and then you're usually paying warrants too. Venture debt can give you material amounts of money and usually for longer periods. But venture debt is a little bit dilutive. And it is usually a manual process that takes around eight weeks to approve.
3. Alternative financing
And then you have alternative financing, which is what Capchase does, where it's primarily data driven. So instead of documents and a long process to set up, you can connect your data in three clicks, and then you usually get a percentage of revenue in terms of availability. So imagine: if you have 10 million ARR you can get, let's say 5 million in financing. And then that availability evolves. As the company evolves and grows, the financing you can receive grows too.
There’s one simple fee. And the flexibility of the model means that you don't have to take all the money up front, you can take chunks to deploy over time. You can make sure that the money that you're using is deployed into a money generating activity and not just sitting in your bank.
With the revenue financing options for SaaS companies, you usually repay a fixed amount every month. So you're not paying more if you grow faster. You're usually paying the same amount for the following 12 months or 24 months.