Venture Capital is like water. Too little and you dry up. Too much and you get diluted. — Neil Bearden
Bootstrapping is super challenging. I have a huge respect for founders that manage to pull it off. You need to be super disciplined with cash management and balancing revenue with expenses down to the dollar. Very few SaaSCos manage to bootstrap all the way — and this becomes even more challenging during times such as the current pandemic which is affecting millions of SMBs and enterprises, across the US and globally.
As a SaaS founder, there’s a huge advantage in partnering with a good VC early on. Money is the least important thing they bring. A good early stage VC will help you with subsequent financing, product-market fit and setting up the structure of the company to enable scale. VC money will help you to invest early on in product without having to worry so much on traction. This means that the desired “SaaS hockeystick” can turn out steeper than when bootstrapping.
However, it comes at a steep cost. Dilution.
You have suddenly sold a large part of your business to an investor. You have also acquired a “boss” in the process. A good investor will help you to multiply the value of the pie, and your slice will get bigger faster than if you kept the whole pie to yourself.
The slice that you sell can become extremely valuable, that’s why the cost of capital of raising VC money is the highest you will ever pay. That means that to get the highest return, that money is best spent in product development, attracting “10x” talent and acquiring customers.
But dilution is not always the solution.
Other necessary expenses, like investment in software, infrastructure and working capital can be covered with much cheaper sources.
Let’s look at the 4 most used non-dilutive solutions.
You realize how tough dilution is and you decide you only want to dilute yourself a bit. In fact, the whole process of getting venture debt is eerily similar to getting VC capital. After a long process and several meetings and rounds of pitches you get a term sheet. Then you negotiate for a few weeks and you end up getting only 2–4x of your MRR. This doesn’t affect your runway much, but the price appears reasonable. Then you start adding legal fees, opening fees and the equity warrant. And suddenly it’s not only not effective, it’s also very expensive. On top of that, they have senior claims to your assets in the event of a default. Which means neither you nor your investors will see a dollar until they are paid in full.
You sell a service to a customer. You agree on net 30 payment terms. You invest in the customer, deploy the service and then, you have to wait for 30 days to get paid. If you do this with too many customers, you can run out of cash before the money comes in. That’s why factoring was invented. A factoring company buys an issued invoice from you at a discount and they get paid by your customer. This is what it means for you.
It would be great, except your customer suddenly gets an email from someone they don’t know saying that now, to pay for your services, they (customer) must redirect the funds to the factoring company. This is not great. It sends the signaling that you may be running out of cash (big concern for your customers), you give up an ongoing opportunity to build a relationship with your customer and it’s operationally burdensome, as you need to factor each invoice you issue. Imagine invoicing customers each month… You need to invoice, get receipt of the invoice, then go to the factoring company, then they score your customer, then they pay you a portion of the invoice, then they get in touch with your customer, apply pressure and then they get paid. Now you need to do it all over again. Not the best use of your time or your mindspace.
Revenue Based Finance
You go to a financing provider that looks at your performance and loans you 2–4x your MRR. They have a fixed return on those loans, so until they are paid in full, they take a fixed percentage from your monthly topline. This is a model that’s particularly well-suited to e-commerce companies. They get a sum of cash, invest it all in marketing and collect at the end of the funnel. If you have long conversion cycles and unclear conversion metrics, it’s very hard to calculate how much you are going to pay. If your SaaSCo is growing fast, you end up paying a lot. Imagine paying back 2.5x in just a few months.
So, you don’t want to sell equity and you don’t want to get debt. The other financing products are clearly not meant for SaaS. Do you resign yourself? Why not look around and see what’s new?
SaaS revenue advances — Capchase 😇
As explained before — why tie VC money into working capital? Why use your most precious source of capital into just waiting to get paid by your customers?
There’s something new in the block 👋🏾, and it’s not dilutive and it’s not debt.
You onboard a customer that pays you monthly. You invest in the customer, deploy the service and then you have to wait for the customer to pay each month. You don’t see the full cash until 12 months later! How do you bridge that gap? You get all those future payments on day one. 💥!! Your working capital disappears. The faster you grow, the more funds upfront you can count on. Capchase scales with your ARR and you do not need to renegotiate to get extensions.
And even better. You won’t have to negotiate to get your customers to pay upfront. If your competitor forces upfront payment and you offer flexible payment terms, guess who’s getting the customer? It won’t be the company that forces their customer to set aside a big lump of cash for a service they will use throughout a year. It will be you 💪🏾
Join the non-dilutive revolution!