In June 2020, Capchase didn’t exist. In July 2020, our founders launched the business.
Since then, the Capchase mission has been consistent: to help SaaS companies grow faster with capital, insights and tools . But our progress has been exponential, in no small part thanks to our successful fundraising. Fast forward two years from our founding: we are a series B stage company. Our founders have raised hundreds of millions of dollars in equity, and almost a billion dollars in debt.
During the process - alongside raising a significant amount of money - Capchase learned a lot of lessons about fundraising. Now we want to share these learnings to help other founders do the same.
Raising from a VC
When Capchase raised equity, we raised three rounds: a seed, an A, and a B.
So as a company raising money from a VC, the VC is going to value your company in two ways. One is the intrinsic value and then one is the option value.
Intrinsic value is how much is this company worth right now? It’s based on the situation today, based on the current cashflows. And at the seed stage, there’s nothing: you don’t have cashflows. There's only an idea and it's all in the future. But as the company matures, that intrinsic value should grow: because the company has more cashflow, and a more defined cost base, and so on.
The option value is how much could this company be worth in the future? And that's a combination of storytelling and projections from your data. When you're in the seed or preseed stage, the company has zero intrinsic value and it only has option value. So your value creation depends a lot on storytelling: pointing at other companies in the space, talking about your unique insight. Then as you mature,the balance between intrinsic and option value of your business should shift more towards intrinsic and less towards option.
What happened is that last year, when cost of capital was so low, the option value of many companies was massive. The cashflows those companies were anticipating in the future wouldn’t be discounted at all to today. That meant that there were massive valuations in the market, and a great deal of money to deploy.
There was massive competition for the best companies. And a key way to win deals as a VC was to give a high valuation, or better terms.
So when Capchase raised money with VCs, there were three key things we learned led to success. The core of any success came from having an idea everybody understood. Alongside that, having amazing metrics of growth, retention, profitability and so on. And finally, building a team of really high performers, the kind of talent that people looked at and could infer instantly that the company was well-managed.
Debt is a different landscape. Consider equity versus debt: equity investors, if everything goes poorly, lose whatever they invested. And if everything goes really well, they can make ten times, a hundred times a thousand times what they invested. Debt investors, if everything goes poorly, also they lose whatever they invested. But if everything goes really well, they make a much lower return on what they’ve invested. Some examples set success for debt investors at around 20% on a yearly basis over whatever they invested. Which is nowhere near the level of equity investors.
So equity and debt investors look at things in very different ways. A VC might look at how massive this business could become: they look at the option value. Debt investors look at the risk. They want to figure out the worst case scenario: what they’re looking for is a business in which, even in the worst case scenario, they are likely to make their money back. This leans far more towards intrinsic value.
The process of fundraising is a little different, because debt is extremely data driven. When Capchase raised debt, our debt investors looked at the portfolio, and they looked at the performance of the different cohorts that started working with Capchase in different months. They stress tested us: what would happen if 10% of the companies Capchase works with default? What about 20%, or 30%? They calculated what it would mean for their returns.
We found that raising debt was a very long process. Four to six months of data analysis, of negotiations, of structuring documents. But then suddenly, at the end of that process, we had a party that committed hundreds of millions of dollars to fund our success, to enable us to offer game-changing finance to the companies we work with. We have found debt financing to be an excellent fit for a business like Capchase. Whatever happens, if we find companies that fit a certain criteria, we have money guaranteed for those companies.
This might be less of a fit for other models like marketplaces, where there's no committed capital. The lender can one day give the marketplace a million dollars. But the following day, they might find an asset somewhere outside of that marketplace that provides a similar yield, but less risk. And then the investor doesn’t go to the marketplace ever again, and then the liquidity dries up.
Debt financing is a tough process, but our founders found it absolutely worthwhile for us and for our customers.
The current situation - and down rounds
But the current situation has many differences from the fundraising landscape of last year, and we at Capchase have been continuing to learn from the changes.
The biggest difference is, of course, that equity dollars are mostly nonexistent or extremely expensive. As a founder, looking at a down round can be very stressful. You might be able to see that your company was worth three times more, three months ago. So instead of considering a down round, SaaS founders should look at alternative sources of financing, be that government subsidies or any form of debt. Because by taking a different path, you can avoid a down round, get more time and figure out how to use alternative sources to fuel your growth and save your equity money. This means your value will be much higher when you do come to raise equity funds again, and you can time this process for when you are in the strongest position - not when you are most desperate for cash.
And remember that the current situation is just that: current. The downturn will pass. Then you can raise money on much better terms. You will have much more revenue and runway to boost both your intrinsic and option value: which will not only make you happier, but your investors too.
For more insight and practical strategies to position your business for success in fundraising, read our guide to Optimize Your Raise.