June 24, 2021

Capital Raising & SaaS Debt Options: Where to Start

Capital Raising & SaaS Debt

One of the things that we pride ourselves on at Bigfoot is even if we aren’t the right capital partner for a company, we can point them down a productive path with a bit of guidance and oftentimes introductions.

One topic that comes up in a lot of startup conversations I’m a part of is around how to raise money and what avenue to raise it through.

I was recently on a podcast talking about raising money (amongst other things). Below are some carve-outs from that conversation.

1. Why There’s a Need for SaaS Debt Options Beyond Venture Debt

If there are 100 SaaS companies and five of them are going to be venture capital funded, what about the other 95? How do they fund their growth?

Do they just have to bootstrap and maybe grow slower?

Not necessarily, but it’s a great option, so don’t discount its value. I’m a fan of bootstrapping and identify as a bootstrapper myself. When you’re light on resources, you have to find ways to do more with less in order to first survive and then to thrive. This constraint builds tenacity and resourcefulness and drives creativity ultimately feeding into your broader company culture. It’s a great way to build a healthy company that is set up for long-term success with optionality. Yes, you may grow slower but you’re much less likely to flame out.

Do they get money from a bank?

Unlikely w/o that venture backing or meaningful cash flow/tangible assets or significant Founder net worth that goes on a personal guarantee.

Do they raise other forms of equity that aren’t traditional VC?

Totally possible, not easy. Can be a lot of cat herding and convincing. Hard to scale.

Do they get venture debt? No. Why?

Venture debt lenders are primarily looking to the equity sponsors when making their lending decision. If you don’t have a sponsor (i.e., venture capitalists) standing behind your company, the venture debt lender’s decision is pretty easy. It’s a No. Not a viable option for you.

If you do have venture capital funding your company, then it’s a question for the venture debt lender of the quality of those VCs. There are a lot of venture funds out there, and they are not all equal. Venture debt may not be accessible to the portfolio companies of a given fund if they’re not deemed to be quality enough and then, in turn, venture debt is not available to you.

Do they have other debt options these days?

Yes, more than ever from a growing set of providers with different strategies, objectives, approaches and structures. Many of these lenders (ourselves included) do not require institutional venture backing in order to lend to a company. This means we (and they) can lend to a much broader swath of companies, some portion of the 95 out of 100. Let’s talk about it.

2. Founders Beware of the Equity Raise Hamster Wheel

As Founders, we often hear that we need to plan to raise equity every 18 months. Why exactly?

Well, the reasoning is that it takes 12 months to put the money to work (burn it) to hit milestones and prove traction and then 6 months to raise our next round on the back of that traction.

I view this to be an artificial benchmark put forth by venture capitalists who need to show markups in their portfolio to current and prospective LPs in order to please them and raise their next fund.

VCs, who have outsized influence in the startup world, are pushing their own traction and capital raise timeline down to the companies they fund.

I’m not saying this is wholesale wrong or disingenuous. At the end of the day, we all, including VCs and any breed of capital provider, have our own businesses with their own dynamics.

I am saying that Founders should not just accept it as gospel because everyone says it and it’s just the way it is.

That’s a great way to sign up for someone else’s agenda and put yourself on a hamster wheel of constantly thinking about near-term fundraising.

This drives short-term thinking, increased pressure and distraction at the executive level that filters down throughout the organization, impacting execution and morale and ultimately potentially impeding longer-term value creation.

Oh yeah, it can also lead to selling too much of your company as you grow just because you think the primary purpose of that growth is to raise more money.

As a Founder, it’s your responsibility to understand your investor(s) expectations and objectives (most Founders don’t) and there is merit in having a timeline to drive results, but it can also cause undue pressure that pushes companies in unhealthy directions.

For us, every case is situational in mapping out the timeline for future capital raises, and, while it should not be wishy-washy and constantly changing, it’s certainly ok for it to be fluid and evolving. I think the 18 month standard is simply too inflexible to apply to all companies that have raised VC.

3. How to Foul up Your Capital Raise – like kind of, sort of raising

When you are out raising money, it’s great to be calm, collected and confident, but, as I’ve written about before, the last thing you should be is casual in your efforts.

I have a, possibly terrible, saying that Casualization is not Capitalization. You’re either raising or you’re not. This comes back to not being wishy-washy.

That’s a surefire way to turn off anyone who may have a modicum of interest in funding your company. If you’re casual about this core strategic effort, how do you run the rest of your business that is meant to deliver value to the capital funding it?

So, how do you not be wishy-washy? It starts with conviction and commitment. If you lack those, you won’t succeed and you shouldn’t even start.

I don’t see how you can have conviction in a capital raise if you don’t know why you’re raising capital in the first place. You raise capital to support a strategic plan which should encompass things like…building more product, reaching out to the market to get more customers, hiring the people and paying for the programs that help you do these things.

Once you have your plan, you need to be ruthless in executing to get the capital to support it. This is where the commitment comes into play. For most of us, raising capital is a multi-month process with a lot of rejection, frustration and surprises. It can be a total beatdown OR you can embrace it for what it is and come prepared for battle.

I won’t go into all of the details here of what that commitment to execution looks like. I’ve previously written about a good chunk of it here and will be wrapping a few more pieces into an ebook on Capital Raising Pitfalls.

If you’re interested in chatting about any of this, grab some time and we have more stuff like this in our monthly newsletter if you want to subscribe.