senovoVC
Published in

senovoVC

The non-equity sources of financing for SaaS startups in Europe

By Mitya Ilyinov (originally posted to Flickr as crossroads) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons
  • Venture Debt:
    This is probably the most prominent alternative to growth equity with a number of established providers in Europe, e.g. Kreos Capital, Columbia Lake Partners, Harbert, BOOST&Co (UK) and Silicon Valley Bank (recently expanding in Europe). In 2015, Barclays was the first of the big four banks to also offer debt funding for early stage companies in the UK. Providers of venture debt typically look for companies with significant assets or cash flows (ARR>$1m) and/or attractive growth rates and unit economics and/or institutional equity investors on board. Their investment size ranges from $1M up to $10M and is mostly tied to the amount of capital raised in the last equity financing round (rule of thumb: 25%–50%).
  • Acceleration Capital:
    In late 2016, The Riverside Company announced a new growth lending fund, Riverside Acceleration Capital (RAC), which has an exclusive focus on enterprise software companies. At first glance, their offer looks very similar to those of other venture debt providers but they’re actually quite different in some aspects which will become more clear later on. RAC initially lends capital in the amount of $500k-$4M to companies with a history of efficient growth and a proven business model (ARR>$1.5M).
  • Working Capital Loans:
    A much less known option which is particularly suitable for SaaS businesses is working capital loans which are mainly provided by banks and trade finance providers, e.g. Deutsche Handelsbank in Germany. The prerequisites for receiving working capital loans are quite similar to those for venture debt, i.e. significant working capital/cash flows (ARR>$1m for SaaS businesses) and/or institutional equity investors on board. Loan sizes start at $100k and are typically tied to the receivables/MRR of a company.
  • Venture Debt:
    The maturity (date on which the loan ends) is typically somewhere between 2–4 years with grace periods (periods without repayment) of up to 1 year. Some venture debt providers allow balloon repayments, meaning that you mainly make interest payments during the contract term and only repay the outstanding loan amount at maturity. Current interest rates range between 10% and 15%, but the total return expectation of venture debt providers typically lies somewhere between 12% and 25%. Therefore, venture debt providers often combine their loans with warrants or rights to purchase equity. Those warrants allow them to convert a share of their loan (rule of thumb: 5%-20%) into equity at the share price of the last equity financing round. These options are usually exercised before an acquisition or an IPO.
  • Acceleration Capital:
    RAC’s model looks quite a bit different as they give money as a 5-year note and expect you to pay back a fixed amount between 1.5x and 1.8x their investment within that timeframe. Repayments start immediately and are coupled to the monthly revenue of your company. That also means that their return in terms of annual interest pretty much depends on how quickly you grow your revenues. Similarly to venture debt providers, they might combine their note with warrants or rights to purchase equity. Furthermore, RAC emphasizes on its ability and willingness to provide follow-on equity capital from their multi-billion PE fund.
  • Working Capital Loans:
    Working capital loans are typically provided as revolving line of credit or as current account. Current interest rates range between 8% and 12% and the investment is secured on your receivables. Loan agreements do typically not include any warrants or equity kickers making it a “true” debt instrument.
  • Venture Debt:
    In my opinion, venture debt is best suited for prolonging your runway to a next equity round or an exit. This is especially the case if you feel that you can significantly increase your valuation by creating more traction or reaching a major milestone until then. Also, it can be a very useful instrument to fund acquisitions as cash flows from the acquired targets may be used to repay the debt. Venture debt is also sometimes used to prevent the need for a bridge/down round to get through a tough period, but my take on this is, that it’s mostly not a good idea and puts you under extra pressure if things don’t work out well.
  • Acceleration Capital:
    As the name says, RAC is best suited for accelerating your pace of growth as add-on to a (recent) equity round. This facility may help you to expand faster and reach your next milestones in shorter time. In my view, it is quite similar to an upfront payment from a very large customer contract which you have to pay back in smaller monthly rates (reducing your future cash flows). Considering that investment sizes only go up to $4M and the immediate start of repayment it is less suited for acquisition financing unless you have a target that creates positive cash flows right from the start.
  • Working Capital Loans:
    Working capital loans are typically the cheapest source of financing for a SaaS startup and perfectly suited to cover your short-term cash needs. They, in particular, may help you overcome liquidity shortages due to some customers’ low payment moral. Being rather limited in size and contract term, they are not well suited to fund long-term projects or acquisitions.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Andreas Melzer

Hooked on all things tech and chess // Finance & Revenue Operations @quantilope