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How to Not Get Funded

In speaking recently with Brian Parks, founder of Bigfoot Capital, we touched on the primary reasons that SaaS financing deals ultimately fall through – or fail to even get off the ground in the first place.

Bigfoot receives hundreds of inquiries a year, evaluates ~40% of those inquiries, and ultimately finances ~10% (25% of what they spend time evaluating). Throughout their process, it’s paramount for them to run as efficiently as possible and not string Founders along. In order to do so, they rely on Founders to engage with them, providing data and time to talk through their request for capital and the business holistically.

Even though many founders claim to need growth capital, Bigfoot is at times left standing there with open arms with the founder nowhere to be seen. Without true engagement, the process stalls out, creating a mutually frustrating outcome.

It seems counter-intuitive, perhaps even unlikely, that founders would go radio-silent on a partner who could provide them with much-needed capital and ongoing support, but it happens consistently.

So, why do so many founders ghost?

In our conversation, Brian quickly summarized what he perceives as the primary reasons as to why founders don’t follow through on the funding process, which we’ve summarized below. We’ve also included suggestions for founders/executives to get ahead of these hurdles, so that their own funding process isn’t delayed when it matters most: at the time when capital is needed to sustainably grow your business.

Reason 1: Lack of commitment

Brian sees a lot of Founders come through who lack commitment to truly investing in the fundraising process. For success, alignment of effort between the founder and the potential financing partner is really important. By no means should this be a harrowing experience, but it does take attention, communication and collaboration to succeed, all of which also matter for relationship building and getting the partnership off on the right footing.

Proposed Solution:

Regardless of the type of funding they are pursuing, founders need to mentally and logistically dedicate time to their fundraising processes. “Fundraising is a full time job” is an adage often attributed to raising from VCs, and it ought to apply, at least in part, to the process of raising non-dilutive capital as well. In other words: clear time on your calendar and make sure your team or co-founder can handle the day-to-day of the business for 2-3 days a week so that you’re able to focus solely on the fundraise during those times. 

Reason 2: Coming Unprepared

Bigfoot really tries to communicate and streamline their process and requirements as clearly as possible to minimize any surprises. If companies have their operations in order, it’s pretty straightforward. If not, it’s a lot more manual with more back and forth and confusion/pain.

Proposed Solution: 

Make sure you have your data, story and documentation in order before you begin your investor conversations. A helpful post on this topic can be found here if you need to learn more. Brian recommends utilizing tools like ProfitWell or SaaSOptics to track/share metrics and having at least outsourced accounting/finance support in place. Bigfoot has built SaaSScore.co on top of ProfitWell’s Metrics API to streamline the data acquisition process and provide Founders with an indication of their SaaS health and financing that may be able to access from Bigfoota. Check it out! See in section 4 how this puts you in a position to WOW any potential capital partner, have them lean in and drive a successful financing. Ideally, you are the most buttoned up company they have ever looked at. That’s a good goal to set for yourself and your team from the get go (and applies to any form of financing throughout the life of your company). Being fully prepared across all facets of your business makes every subsequent financing that much easier (and enjoyable). 

3. Fear

Raising money is always an unknown endeavor, whether or not you’ve done it before. If you haven’t done it, it’s fear of the unknown, fear of failure, fear of impending judgement and pain to be inflicted upon you. If you have done it, many of those fears still exist along with any battle scars you still carry from previous fundraising experience. There’s also the psychological fear of debt. What if I can’t pay them back? Can/will they take my company? How will other potential investors view me/my company having taken this money? It’s our job to cut through all of this and deliver comfort and certainty as a partner.

Proposed Solution:

This is unique for each person, so it’s a bit tougher to provide blanket advice. However, remember that you already have a business, you know where you’re headed, and with the right capital partner you’ll be able to simply be even more successful. Any investor who works with you wants you to succeed as well (test them on that, get references) – they’ll be right there, literally supporting you and cheering you on, so don’t view it as a daunting task… instead, perhaps it’s helpful to view the fundraising process as simply finding the partner with whom you’d like to succeed.

4. Value Perception Mismatch

When there is a material mismatch between the perceived investment that you have to put in up front and the resulting value you may receive by having done so, that can foul things up. If you can’t clearly determine the value you can create (and retain) from the capital you’re seeking, you may need to pause and do some thinking. Also, have the potential capital partner help you determine the value (do some collaborative modeling). Take the time to build a relationship with the lender.

Brian mentioned he recently received a 10-page beast of a diligence request from a new capital partner for Bigfoot, and he simply has to satisfy it to get their $ and grow Bigfoot. He and his team cranked it out in four days with focus and collaboration. View this as your opportunity to shine and differentiate. Brian’s proud of the way they have built Bigfoot, so this is an opportunity to expose new parties to how they operate.

How did they do it? They had their sh&t together from the previous three years as they were building their business, with an eye to the future. Founders need to realize that you just have to put in the work (and should do so beginning day 1) and the value will come from doing so.

Proposed Solution:

This is related to both #1 and #2 above, yet we’ve decided to parse it out as it’s focused more on the expectations than it is on the actual documentation and diligence process. Simply remember that someone is going to be cutting you a sizable check. Would you give a stranger $10,000 without asking questions and receiving some assurances from them?  How about $100,000 or $1M?  If you put yourself in the shoes of the investor, you’ll understand why they are requiring certain elements within their diligence process, and as a result, you’ll be a better partner for them as well — all of which will likely result in a better working relationship long term.

If you avoid the hurdles above it certainly doesn’t guarantee that you’ll get funded, but if you go bumping into these hurdles one by one, fumbling through the process because you weren’t prepared – it’s going to be damn hard to get that term sheet in your hands. 

Collaboratively authored by Brian Parks and Thomas Rush

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What do I need to obtain growth capital for my company?

Having your ducks in a row is easy to do, and is critical in order to obtain capital from a lender, investor, VC, or other person / institution. Yet it’s amazing how many founders begin the fundraising process without first preparing their books and proper documentation which will save them a huge headache down the line.

So what do you need to have prepared? In short, you ought to at least have the following documents up to date and ready to go for any lender or investor:

  • Balance sheet (previous 3 years, or as far back as applicable)
  • Income Statement (previous 3 years, or as far back as applicable)
  • Cash Flow Statement (previous 3 years, or as far back as applicable)
  • Previous tax returns (previous 3 years, or as far back as applicable)
  • Cap Table

And then, depending on the type of financing you’re pursuing, it may be helpful to also have the following:

  • Accounts receivable aging report
  • Accounts Payable aging report
  • Investor Deck
  • Financial projections

Most of this you can export out of your accounting software quite quickly, and you’ll have a smoother time with your investor conversations too. It’s a win-win, for a relatively low-effort output.

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The Bootstrapp Guide to Startup Funding Options

Industry Background

Venture capital isn’t a new phenomenon by any means; in fact, it has been around for a very long time, but in the last 100 years, it’s relevance has boomed.

One of the key moments in history was J.P. Morgan acquiring Carnegie Steel Company in 1901 to form U.S. Steel. This deal marked the advent of modern-day private equity.

Another moment that ignited the industry occurred in 1957 when Digital Equipment Corporation (DEC) received a $70,000 investment from American Research and Development Corporation (ARDC). At the time of the IPO, ARDC’s stake in DEC became worth over $38 Million, just your average 500x multiple. This deal was one of the first major venture capital investments. Oddly enough, that model has hardly evolved, until recently.

Over the past few years, the pace of evolution has quickened. There are virtually limitless amounts of investment models (SAFE, SEAL, KISS, Insert another confusing acronym here, RBF, and more). However, because the models are still quite young, there isn’t much publicly available data on them, let alone simple, clearly defined definitions of each. 

This guide acts as an attempt to simplify the conversation. We’re attempting to dive into the world of startup finance, breaking each financial instrument down into its component parts to understand its mechanics better. But to get there, we have to start from the top, so let’s consider that detailed breakdown as “out-of-scope” for now. 

This guide is all about simplifying the world of startup financing- presenting all the information in simple language, not lawyer language. So, let’s start with the basics.

The Current World of Startup Finance

If you head over to google and search “startup finance,” you’ll stumble into tons of articles on Venture Capital, Angel Investors, and loans. And rightfully so, those three options have dominated the startup finance game since the ‘60s and beyond. 

Venture Capital

Venture capital is a form of private equity where venture capital (VC) firms and funds (typically) invest in early-stage, high growth potential startups for an equity stake. VC, generally speaking, has been extremely successful and has funded big-name companies from SpaceX to Airbnb. Still, obviously not all companies turn out to be unicorns like Airbnb or Peloton. 

Because of this, venture capital firms tend to look for unicorns,  privately held startups valued at over $1 billion, to create their success because 25-30% of VC backed startups fail which results in VC firms losing out on the money they had invested.

Angel Investors

Beyond VC firms, startups often look to angel investors, individuals who provide capital for a business start-up, usually in exchange for convertible debt or equity. The show Shark Tank has drawn a lot of attention to angel investors because all of the “sharks” are actually angels. 

The main difference between angel investors and venture capitalists is that angels tend to be very wealthy individuals who fund the venture through their personal assets while venture capitalists are employed by venture capital firms to essentially invest other people’s money.

Until recently, if you wanted to fund your company’s growth, you had to be willing to part with some equity, but different fundraising techniques like Revenue Based Financing (RBF) took off in the 2010s.

Once again, there is no single answer to the question, “What is the best way to fund my startup?” No method is blatantly superior to the other. Still, there are advantages and disadvantages of every option, and this is a guide to identifying the strengths and weaknesses of multiple options.


For a lot of founders, raising VC money isn’t a great fit. It means giving up valuable equity and potentially giving up control in the direction of their company depending on how large a share the investors take. That’s not to say everyone should avoid venture capital, but there are a number of other options that founders should be aware of that may be a better fit for them. Below, we’ll break down the most common options for obtaining financing, as well as their pros and cons. 

SBA Loan

For an SBA Loan, the Small Business Association guarantees part of the loan reducing the risk for the lender. These types of loans are very affordable, but the requirements are strict, and receiving funding can take longer than a traditional loan.

  • Pros: 
    • SBA Loans are lower cost
    • Favorable repayment terms
    • Low monthly payments
    • Available for many uses
    • Less collateral required
  • Cons:
    • The low cost of an SBA loan comes with strict requirements, and due to the increased scrutiny, the approval process can be longer than traditional loans.
    • Good credit is often required
    • Numerous SBA programs exist which can be confusing
    • Personal guarantee often required

Business Line of Credit

A business line of credit is very similar to a business credit card. You can use it whenever it’s needed as long as you don’t exceed the predetermined limit. However, with a business line of credit, you can also withdraw cash. There are two kinds of business lines of credit; revolving and non-revolving. With revolving credit, you can use the funds, pay them back, and your credit limit doesn’t expire or close – allowing you to leverage that same line of credit again in the future. With non-revolving credit, you can also borrow the funds up to the limit of the credit line; however, once you’ve returned the capital to the lender, the credit line will close.

  • Pros: 
    • Build business credit
    • Smooth cash flow during leaner months
    • Interest is only charged for capital you use
    • Flexible loan product
  • Cons:
    • Difficult to qualify
    • Can be expensive
    • Limits can be low
    • Application is time-consuming
    • Difficult to choose the best lender

Equipment Financing

Equipment financing helps you buy equipment for your business. You can use it to purchase new and used machinery, cars, or any other equipment your business may need.

  • Pros: 
    • Low APR
    • Predictable monthly payments
    • Builds business credit
    • Equipment serves as collateral
  • Cons:
    • Can require a high down payment
    • Good credit is needed to obtain reasonable terms
    • Only available for equipment purchases

Invoice Factoring

Invoice financing allows businesses to borrow money against outstanding invoices or sell those invoices at a discount. It works by providing a cash advance based on a percentage of the unpaid or outstanding invoices. Generally, you can receive between 50-90% of the value of outstanding invoices depending on the risk that those invoices will ultimately be paid. 

  • Pros: 
    • Fast approval without much paperwork
    • Can mitigate cash flow emergencies
    • Transparent and easy to understand pricing
    • Personal credit is not a major factor
  • Cons:
    • Relatively high rates/fees
    • Need invoices as proof/collateral
    • Mostly unavailable for business to consumer businesses

Personal Loan for Business

A personal loan is money borrowed from a bank, credit union, or online lender that can be used for any number of purposes. As long as the lender doesn’t restrict it, you can use a personal loan for your business. Most personal loans are unsecured, so they don’t require any collateral.

  • Pros: 
    • If your business is just starting out, it may be easier to get a personal loan than a small business loan
    • Personal loans tend to have lower APR’s than credit cards
    • A personal loan is flexible and can be spent on anything from office supplies to credit card bills 
  • Cons:
    • No tax credits, as you might otherwise receive if you were to take out a business loan
    • If the loan is secured, assets like your house may be used as collateral
    • Personal loans are usually smaller than business loans
    • Generally higher rates than a business loan

Merchant Cash Advance

Merchant cash advances (MCAs) can be a riskier form of financing. Some carry APRs in the triple digits, and their daily repayment schedule can lead to a debt trap where it is nearly impossible to repay without refinancing. A merchant cash advance provider gives you an upfront sum of cash and takes fixed debits from your bank account on a daily or weekly basis. Some merchant cash advances are structured similarly to a royalty payment, except they are paid back by the lender receiving a portion of credit card transactions instead of overall revenue.

  • Pros: 
    • Merchant Cash Advances are quick with no heavy paperwork
    • MCAs are unsecured, so you don’t need any personal or business collateral
  • Cons:
    • Much higher fees and interest rates than a revenue-based financing deal 
    • No benefit to repaying early

Business Credit Card

Business credit cards can be a useful tool for small business owners. They’re a convenient way to increase your company’s purchasing power. Business credit cards essentially have two categories. Cards with low APRs and cards that earn business owners’ rewards. If you plan to carry a balance, a card with a low APR is probably better. If not, you might want to maximize your rewards. 

  • Pros: 
    • Some cards have lucrative bonuses
    • Flexible 
    • Convenient
    • Separate your business and personal expenses
    • Build business credit
  • Cons:
    • Business cards tend to offer fewer protections and come with higher rates and fees
    • Higher rates and fees than an SBA loan
    • Business credit cards provide less protection than personal cards

Purchase Order Financing

Purchase order financing is very similar to invoice factoring except that instead of selling receivables invoices, the small business will sell their purchase orders for inventory or a specific service. This means the business doesn’t need to have delivered their service yet. PO financing works best for companies that offer a tangible product since they can sell the purchase order to receive the capital needed to provide the product or service. 

  • Pros: 
    • Don’t have to turn down business due to working capital constraints
    • May be able to qualify with poor credit score
    • New or small companies that don’t qualify for a traditional loan may still be able to access purchase order financing
    • Not a loan so no monthly payments
    • No equity is lost
  • Cons:
    • Not usually fast
    • Financing costs can be on the high side
    • If the client who placed the order has poor credit your business may have a hard time qualifying
    • Your customer will typically have to pay the financing company directly

Venture Debt

Venture debt refers to a variety of debt financing products offered to early and growth-stage VC backed companies. It’s typically structured as a term loan that is a percentage of what was raised during the last seed round. Taking on debt allows founders to save dilution for a future round of financing. Typically, the loan is around 30% of the last round. If your startup raised $10M in a Series A round, you would probably be able to borrow around $3M.

  • Pros: 
    • Preserves equity
    • Useful as an additional cushion on top of equity financing
    • Provides runway in between financing rounds 
  • Cons:
    • Debt needs to be repaid
    • If the company defaults on payments the venture debt managers could force the company to be sold or be liquidated
    • Without backing from a VC firm, venture debt is near impossible to find

Grant

Some businesses may qualify for grants from a variety of different organizations. Federal grants are only offered to nonprofits, educational institutions, and state and local governments, but sometimes nonprofits or state and local governments offer grants directly to small businesses.

  • Pros: 
    • No debt
    • No loss of equity
    • Veterans, young entrepreneurs, women, and minority business owners may qualify for financing and other resources
  • Cons:
    • Not available for most businesses
    • Application process can be long
    • Often a competitive process

Crowdfunding

Crowdfunding for small businesses is a fairly new option. It wasn’t legalized until 2016, and companies are allowed to raise $1.07M every year through regulation crowdfunding. There is also Regulation A+ funding, which allows companies to raise up to $50M each year, but launching is significantly more expensive and time-consuming.

  • Pros: 
    • Available for startups
    • No need for collateral
    • Investors can advise your company
    • Can receive a large sum of money
    • Ability to test if there is a market for your business
  • Cons:
    • Unlike VC funding, investors from crowdfunding are unlikely to add anything besides money so you might be missing out on connections or experience
    • Takes a lot of preparation and effort to pitch investors
    • Most crowdfunding platforms charge fees
    • Can take some time to get the cash
    • Giving up equity

Equity Financing

Equity financing is the process in which companies sell equity in their company to investors to raise capital. Usually, these investments come from angel investors and venture capital firms.

  • Pros: 
    • Available for startups
    • Investors can advise your company
    • Can receive a large sum of money
    • No repayment necessary
  • Cons:
    • Loss of equity
    • Not many small businesses will be considered
    • Difficult to receive funding

Revenue Based Financing/Royalty Financing/Shared Earnings Agreement

Revenue-based financing is an alternative financing option for small businesses in which they receive funding in exchange for a percentage of future revenue. Lenders charge a fixed amount, and payments are typically capped between 1.35x to 3x the amount borrowed. The biggest benefit is how flexible these loans are since, during slow months, the business will pay back less than they do during hot months. We even have a calculator on our website you can use to find out what your payments look like with this type of financing.

  • Pros: 
    • No loss of equity
    • Pay less during months with lower revenue
    • No personal guarantees
  • Cons:
    • You’ll pay more long term
    • You need revenue to qualify
    • Payments can place strain on your operating capital

Peer to Peer Lending

Peer-to-peer lending enables individuals to get loans from other individuals and cuts out the middleman. For qualified applicants, the rates are often lower than a bank loan, but for less qualified applicants, the rates can be higher.  

  • Pros: 
    • More accessible than a business loan 
    • Fast and easy process
  • Cons:
    • Low credit applicants may end up with a higher rate 
    • Not well regulated 

Working Capital Loan

Working capital loans are a specialized type of loan designed to help businesses meet their day to day operating costs. These loans are typically short term and designed to cover urgent cash flow issues.

  • Pros: 
    • Cash on hand to deal with any problems
    • Non-dilutive
    • May not need collateral
    • Borrow and repay quickly
  • Cons:
    • Short term
    • Needs to be repaid and might have a high-interest rate due to the short repayment period

SAFE

SAFE notes, or “Simple Agreement for Future Equity,” were invented by Y Combinator with the intention of creating an alternative to convertible notes. They function in a similar fashion, but unlike a convertible note, there is no debt component. 

  • Pros: 
    • Less complicated than a traditional equity round
    • No interest paid on the principal amount
  • Cons:
    • Sophisticated investors might object to using a SAFE
    • A convertible note that is too large may negatively impact the next round of financing
    • Companies must be incorporated to offer SAFE notes
    • Equity is diluted when SAFE is triggered

Convertible Note

A convertible note is a type of debt that converts into equity when certain actions take place like a new round of fundraising or an acquisition. If you want to take a look at what a convertible note term sheet looks like, Indie.VC uses a modified convertible note for all of their investments and publishes their term sheet here.

  • Pros: 
    • Less complicated than traditional equity round
    • Companies can delay placing a value on themselves
  • Cons:
    • Some investors are reluctant to use convertible notes since they may be forced to convert their debt to shares with unfavorable terms
    • A convertible note that is too large may negatively impact the next round of financing
    • Equity is diluted when the note converts

SEAL

SEAL stands for Shared Earnings Agreement, and it’s typically used as a substitute for convertibles and straight equity deals. SEAL investors get an agreed-upon percentage of net income up until a certain cap. In a priced funding round, a SEAL operates in a similar way to a SAFE or convertible note. You can take a look at an example term sheet here.

  • Pros: 
    • Simple structure
    • Equity conversion basis is reduced as payments are made
  • Cons:
    • There is still a base amount of equity given up even if the earning cap is met
    • Equity is diluted when SEAL is converted to equity 

The world of startup financing is incredibly murky. When trying to find financing, founders typically get a random recommendation from a friend/lawyer/banker who is under-informed, or they roll up their sleeves and start researching the entire space from scratch. Then, after finding a financier, they’re left to negotiate the terms blindly and without context. Bootstrapp is here to help level the playing field and eliminate the work of finding non-dilutive capital, saving founders and their employees valuable time and equity.

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Defining “Value Preserved” – A New, But Core Concept in Growth and Debt Financing

The technical explanation: 
At Bootstrapp, we view the “value preserved “”the retention and/or accretion of potential value from the alternative chosen, as compared to other alternatives.” This is typically measured as the amount of equity value, in dollars, that a company’s leadership is able to retain for themselves, employees, and other shareholders instead of needing to sell the equivalent amount of equity-value to equity investors. This value typically grows as one projects into the future, with a strong correlation to the growth in overall enterprise value. 

The Plain English Explanation
Think of value preserved as the of opportunity cost. Instead of missing out on something because you didn’t pursue an opportunity, you actually retain, gain, or preserve value within your company because you did not pursue an opportunity. Furthermore, opportunity cost is defined as “the loss of potential gain from other alternatives when one alternative is chosen.” Value Preserved, as we define it, is a type of opportunity benefit – i.e., “the retention and/or accretion of potential value from the alternative chosen, as compared to other alternatives.”

Let’s use an example: 
What if you sold 10% of your company today for $1M. That would mean that your company is currently worth $10M. Not bad. Now what if in five years, it’s worth $50M. That same 10% of your company is now worth $5M – and recall that in this scenario you sold it for $1M. Obviously that’s all fine and dandy – an investor took a risk on you and they should be rewarded for it. However, what if you – as a savvy founder – were able to obtain that same $1M that you had originally needed, but split it up and took out $500k in debt, and then only sold 5% of your company for $500k – so that you still ended up with the same capital that you would have had otherwise, but you sold only half of the equity. 
 
Later on, using the same scenario, the 5% of equity that you sold would be worth $2.5M – meaning that the 5% of the company that you DIDN’T sell would also be worth a cool $2.5M. You just preserved $2.5M in equity that you now own instead of the investors owning it. You get to keep that cash during a liquidation event instead of them.
 
Now obviously, in this scenario, you’ve also taken out debt – and so you’ll be paying interest on that debt as well. So it’s not a perfect comparison. But it’s easy to also calculate the interest payments you’ll be making on the proposed $500k of debt, especially if you have concrete offers from financiers with hard numbers so that you can simply run the math. 

And so the next step is easy: you take the $2.5M of equity that you preserved, subtract the interest payments that you’ll need to make as a result of the debt, and voila: You have your “Preserved Value”. Depending on a number of factors, the preserved value can sometimes be in the millions – and many founders simply sell that value to equity investors without giving it a second thought.  
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Directory of Investor Marketplaces: Are they the next big thing? It’s doubtful.

Investor marketplaces seem to be all the rage nowadays. In fact there are eight of them that we’re currently aware of:

There are several issues with equity investment marketplaces however. 

First, and most often mentioned among founders and investors alike, is the issue of adverse selection. Strictly speaking, adverse selection is a market situation where buyers and sellers have different information. That itself, in the strictest sense, is common across almost every market — since nearly zero markets actually have perfect information symmetry. However, perhaps even more relevant is an example of adverse selection: George Akerlof’s idea of the Market for Lemons, in which the sellers (founders in this case) are selling both lemons (a terrible car with lots of problems) and peaches (a great car that will require minimal repairs). 

In this scenario, buyers (investors) change the price they are willing to pay to accommodate the risk of buying a lemon. However, that drives peaches out of the market, further reducing the price that a buyer is willing to pay because now the chance that they end up buying a lemon is even higher. Imagine you’re buying a car from a very high-end dealership dealing only in brand new cars under warranty — surely you’ll pay a premium for the risk that has been reduced for you as compared to the scenario of purchasing a car from a small roadside used car lot, where the risk of a lemon is greater. This is the kind of market that investor marketplaces often generate: one where the number of lemons is unknown, and therefore affects the prices of even the strong assets for sale. As the price drops due to the unknown quantity of lemons within the available inventory (whether the inventory is cars, companies, or something else), more and more peaches are driven out of that specific market, and the feedback loop continues until, in the worst case scenario, only lemons are left. 

That is one example of why these marketplaces don’t work, however, I think there are broader issues at play as well. 

1. Most equity investors rely on social proof as a filter for making investments, whereas these marketplaces strip that away from the process (for the most part). 

2. The best investors don’t use these marketplaces. Therefore, we end up with the reverse scenario as described above – where the best founders now avoid these marketplaces because they are aware that the top investors are only found elsewhere. Thus creating a feedback loop that continues to degrade the quality of both deal flow and investors participating. 

3. The obvious: there are eight — count ’em — eight marketplaces listed here. Meaning that even if the other issues were overlooked, both sides of the market are now fragmented further, and they are 87.5% less likely to be matched with their ideal counterpart. 

All of that said, these marketplaces clearly garner participation from both sides of the market — demonstrating that although they may not be perfect, they are serving a need.

This directory is a living document and we work to update it as often as possible. Please contact the team at Bootstrapp if you would like to submit an organization for consideration — you can simply shoot a quick note to [email protected] and we will review your submission. 

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The Best Growth Capital Tools from Around the Web

Growth capital tools are an ideal solution when you want to transform complex masses of information into an easy-to-understand chart, summary, or calculation for your business.

Using these tools can be beneficial since they help you make decisions, but finding the right tools is difficult. To help you get started we’ve selected our pick of the best growth capital tools and apps out there. To give you more choice, we’ve included both free and paid options.

Give these top tools a try and let us know which ones you get on with by sharing your favorites on Twitter.

Cash Flow

Runway: A free, visual tool to help you understand, manage and extend your cash runway. (Free)

Float: Get a real-time view of your cash flow and make more confident decisions about the future of your business. ($49/mo)

Equity

Foundrs: Calculate the proposed equity percentage that each founder ought to receive based on time, money, and resources invested into the company. (Free)

Capshare: Issue stock and manage all your equity in one place without getting bogged down in spreadsheets and paperwork.  (Free)

Accounting

Bench: Get a professional bookkeeper at a price you can afford, and powerful financial reporting with zero learning curve.

Pilot: Pilot takes care of your bookkeeping from start to finish so you can focus 100% on making your business succeed.

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Revenue Based Financing for SaaS Companies

At this point I’ve spoken to nearly every revenue based financier in New York, and one theme continues to rear its head, which is that B2B SaaS are the clear favorites of the RBF industry.

If you’re a B2B SaaS company with a regular income stream, you have a very good shot at obtaining Revenue Based Financing. I’d certainly recommend you check out all of the RBF Options we have available on our site, as I think you’ll find you qualify for quite a few.

The reasons for this are fairly obvious:

  • B2B companies have a higher price point and can typically afford to pay for a service for the foreseeable future.
  • SaaS companies inherently have steady revenue streams – thus making the borrower much more solvent in the long-term.

Have other questions we could answer? Feel free to reach out.

Are there topics you’d like us to write about or features you’d like us to build? Request it here.

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Revenue Based Financing Firms and Companies

I get a lot of questions about revenue based lenders, and you can obviously find all of the growth capital options yourself using our web app which will provide you with customized recommendations. However, to make it even easier for everyone who would like to do their own research please refer to the list below of revenue based financiers that we’re aware of. Do you know of any others? We’d love to hear about them! Please just drop the name of the fund / company here.

List of companies / funds that offer Revenue Based Financing:

Next we’ll be covering the question of How to Choose a Revenue Based Financing provider. It’s a super complicated question that we’ll simplify for you.

Have anything else you’d like to see us write about or build? Drop your idea here.

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How much does revenue-based financing really cost?

There’s an incredibly counter-intuitive aspect of revenue-based financing, which is this: the more successful you are as a company, the higher the cost of capital associated with your RBF.

This is counter-intuitive for a few reasons:

  • It’s the opposite of how society typically views capital. If you walk into a bank and have a successful business, you’ll get a cheaper rate because you’re a less-risky borrower – not a more expensive one.
  • Most people – myself included – generally equate time with money. (You know, the old saying goes…). For example, if you take out a car loan and then pay it back earlier than expected, you’d pay less interest than if you took the full term to pay it back. This makes sense – the lender has their principal plus the pro rata interest, so now they can go lend it to the next person. And you, the borrower, just saved all of the interest that would have been accrued moving forward – had you kept the loan open.
  • It appears that RBF has a structure that punishes borrower for good behavior. In this case ‘good behavior’ meaning that they run a successful company. When someone is more successful than expected, are they expected to actually pay a higher cost of capital?

However, the kicker that will clarify it all is this: The amount of capital paid back in addition to the principal is set in stone, and time is the variable that can change, which is the inverse of the typical model. Compare this to the car loan example above in #2 – where the total amount of money paid back is flexible dependent on when its paid back, and the interest is fixed – based on a fixed period of time set by the lender. For example, many car loans may be structured for 60 months. Time is set in stone, and how much you pay back depends on your ability to pay that loan back faster (assuming no pre-payment penalties).

 

Let’s simplify and use some real numbers. Scenario A: If you were to take out a traditional car loan of $10,000 and pay it all back 1 day later. You’ll only have to pay interest on that 1 day when you had the capital. If you took out a relatively expensive loan and agreed to pay a 10% APR, that 1 day of borrowing would only cost you .027% in interest.

 

However, let’s run Scenario B, this time using the revenue-based financing model: You take out a loan of $10,000 with a fee of $1,000. Most RBF lenders operate on this fee-based model which gives the borrower flexibility as to when they pay back the loan (i.e. time is the variable that can change). Now, no matter when you pay it back, you have to pay back $11,000. If you were to follow the same payback timeline as scenario A, and pay back the $11,000 the next day – your APR would be 3,650%.

 

Obviously RBF loans aren’t built to be paid back the next day, but the math illustrates an incredibly important point: revenue-based financing can be tricky to leverage, as you may actually be leveraging incredibly expensive capital if you’re more successful than you originally projected. It’s a relatively new model where time is a major factor in the cost of capital you use to grow your business – and adds to the complexity of your decision: which instrument do you choose to finance that growth?

How does revenue based financing work?

Check out a quick video walk-through of the tradeoffs you’ll want to consider:

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Equity vs. Debt: There’s Less Choice Than You Think

Let’s simplify things.

I’ve worked with tens of founders, many of whom are interested in non-dilutive capital despite the fact that they have zero, or very little actual revenue. So before we dive into the details, let’s make this easier on all of us and eliminate a few options right out the gate:

  • If your company doesn’t generate revenue, you can’t take on debt.
  • If you don’t have a high-growth business, you can’t take on equity financing.
  • Finally, if you want full control and ownership of your company, then don’t take on equity financing.

Put another way, the above three points can also be stated in the affirmative as such:

  • If you have revenue, you have the option between debt and equity.
  • If you are pursuing a low-growth business or a small market, debt is your only option.
  • If you want control and ownership of your company, debt is your best option.

At this point, you ought to understand generally which category your company fits within, and whether or not you even have the option to pursue debt as a method of financing your company. If you are generating a solid amount of revenue (at least $5k/month at a minimum) we’ll dig into the decision-making process in the next post.

And until the next post is published, to save you the time of scouring the internet, I’ve also gathered up the top articles on equity vs. debt and provided the main takeaway from each:

  • An example scenario of two identical companies – one that chooses debt, and one that chooses equity financing, and then shows the financial impact on each, which is a useful in demonstrating how the mechanics of each work.
    Article: Equity vs Debt Capital Funding: Comparing the Costs

    Takeaway: “if you’re looking for a lower cost of capital for startups, venture debt is often the best way to go long-term (as this scenario explained). But, if you’re looking for operational funding to maintain your organization as you scale up or have already utilized debt financing, SaaS equity financing may be the better route for you.” (take this with a grain of salt as it’s a sales pitch).
  • A well-written article that essentially explains the different types of equity and debt funding, along with some pros and cons.
    Article: Debt vs. Equity Financing: Pros And Cons For Entrepreneurs

    Takeaway: “the biggest and most obvious advantage of using debt versus equity is control and ownership.”
  • A bullet point list of attributes for both debt and equity that has a number of great points buried within it.
    Article: Debt vs Equity in the Startup Venture

    Takeaway: “A company must maintain a debt to equity ratio that meets the capital needs of the company while not making the company fiscally vulnerable. An investor will be reluctant to invest in a highly leveraged business (i.e., has lots of debt) because the equity investment is always subordinate in priority of payment to the debt.”
  • A bunch of quotes from various founders on their one-sentence opinions of the two options. The quotes are all over the map and not very helpful.
    Article: Debt vs. Equity, Which is Right for Your Startup?

    Takeaway: None, but it does provide a number of different perspectives on this issue and shows how difficult a decision this can be without access to proper advice and data.
  • The first article that even references the actual decision. Finally! and thank you.
    Article: The Difference Between Debt and Equity Financing

    Takeaway: None. However, this was the first article to at least mention the question of “How to choose between debt and equity financing” – they just didn’t answer their own question, and instead referenced the weighted average cost of capital (WACC) which isn’t relevant for a decision between debt and equity, but instead helps a company compare scenarios where BOTH equity and debt are involved.
  • This article just defines the different types of financing, for the 1 millionth time on the internet, but does provide a good point about tenure.
    Article: Debt Funding Vs Equity Funding For Startups: Pros And Cons

    Takeaway: “In comparing equity fund vs debt funds, tenures are usually longer for equity funds, while debt funds are categorised into short term and long term. Long term debt funds are raised for capital costs which have high-interest rates, and have company assets as collateral. Whereas short term funds are utilised in recurring payments, have lower interest rates and minimal collateral requirements.”

In my next post, we’ll get into the a more nuanced decision-making process for determining the best path forward among all of the financing options available to you – particularly if you’re a high-growth revenue-generating company, which essentially means the world is your oyster.

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Equity, Speed, and Cash Flow: You Can Only Pick Two

I have a hypothesis, which is that between the three options of:
1. Keeping equity
2. Reducing / eliminating any negative impact on your cash flow
3. Increasing the velocity of your startup / company

that you can only pick two. I drafted up a diagram to help illustrate the point:

To my mind, you can’t ever get all three of those corners of the triangle to align so perfectly that you are able to accomplish each goal simultaneously.

As an example, if you take out any sort of loan / debt, you obviously have put a dent in the future cashflows of your business, however you get to accelerate the velocity of your firm while keeping equity – landing you on the right side of the triangle.

If you don’t want to impact cash flow, or perhaps you don’t have any cash flow to speak of, yet you want to increase the velocity of your company – then you land yourself at the bottom of the triangle within the equity financing realm of the world. Get your pitch deck ready.

And finally, if you don’t want to – or can’t – reduce your future cash flow, and would also like to keep your equity, then you’ll likely need to simply bootstrap your company: that is, self-fund it.

It’s pretty simple. However, if you see any issues with the above mental model I’d love to hear them. Tweet at me if you have any thoughts: @thomasgrush.

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The Full Spectrum of Non-dilutive Growth Capital

The first major venture capital deal was made in 1957, in the form of a $70,000 investment in Digital Equipment Corporation (DEC). Since then, the industry has hardly evolved at all, until recently. 

Over the past few years, the pace of evolution has quickened. There are various investment models (the SAFE, the SEAL, revenue-based financing, and more). However, because the models are still quite young, there isn’t much publicly available data on them, let alone clearly defined definitions of each. 

This post is a simple attempt to simplify the conversation. I’ll dive in much deeper in following posts, breaking each financial instrument down into its component parts so that we can better understand the mechanics of them, but for now let’s consider that detailed breakdown as out-of-scope. 

Today, it’s all about simplifying the world of startup financing – particularly the non-dilutive realm. So let’s start with the basics: 

How are each of the non-dilutive financial instruments defined in layman’s terms? 

Leaning heavily on my experience in the startup finance space, lots of reading, research, and the collection of data on over 140 non-dilutive financing options, I’ve developed the below definitions. They are ordered roughly along a spectrum from debt → equity – meaning that the first item listed (Term Loan) is the most debt-like, while the last (SEAL) is the most equity-like. 

Definitions of growth capital: term loan, venture debt, working capital loan, invoice factoring, merchant cash advance, revenue-based financing, safe, convertible note, seal.

Have a different perspective? Do you disagree with any of the definitions above? I’d genuinely love to hear your thoughts. Please shoot me a note or comment so that we can develop a shared language (i.e., a commonly understood set of references, visions, experiences, and/or interactions that provide a foundation for strong communications) with regards to non-dilutive financing. 

With definitions of each type of financing somewhat settled, I then captured all of the typical attributes of each as well: 

Attributes of growth capital: term loan, venture debt, working capital loan, invoice factoring, merchant cash advance, revenue-based financing, safe, convertible note, seal.

There are certainly exceptions to the typical attributes as I’ve outlined them above. However, in my experience these are directionally correct in the vast majority of cases. If you disagree – please chime in so that the entire community of startup founders can benefit. 

No silver bullet

With a very general and broad understanding of the financial instruments we’ve covered here, it’s clear there is no silver bullet for all founders, and there’s no way to be 100% certain that a particular source of capital is the best one. However, after speaking with hundreds of founders looking for funding, it’s become incredibly clear to me that it’s really difficult to even understand the trade-offs between the various options. And if you can’t even properly account for the trade-offs, a founder can’t be expected to make the best decision for their company. 

As such, this is a framework that is meant to help all founders consider what trade-offs they are making when they decide to choose one type of financing over another. 

Hope it helps, and reach out to our team if you have any questions about anything growth capital-related.

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There Is No Golden Rule

First off, there are no golden rules that come to the world of financing. As any mortgage lender would say, they “take into account numerous factors.”
But that’s not very helpful, is it?

What is helpful, is knowing precisely what works. And from the numerous conversations I’ve had with lenders, investors and financiers overall, the ideal business to lend to is this:

A B2B SaaS company, generating $100k in monthly gross revenue with 80 – 90% profit margins.

Easy right? You just have to go build the perfect business and then someone will finally lend you some cash. But that doesn’t mean you must meet all those criteria for funding. Far from it actually.

In fact, we have an investor in our database who funds a revolving line of credit for as little as $1,000. Now THAT seems reasonable. You don’t need a 90% margin, million-dollar run rate business to justify $1,000 in credit. What do you need? Use our web app to find out.

See you there,
Thomas

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Is Revenue-based Financing Right for You?

If you want to learn about revenue-based financing (RBF), you typically end up at a site where they are also trying to sell it to you. And as a result, the message gets muddled. All of the benefits of RBF are raining down on you from on-high, and along with them, the trade-offs have been stripped out.

If you’re thinking of RBF, you’re going to be making trade-offs, so let’s display them loudly here:

You’ll pay more cash long-term, in order to pay less during your months with lower-revenue.

That’s the primary value prop of RBF. Your repayment of the loan goes up and down with your revenue, which is great, because as a startup you’re no longer stuck servicing a debt that you may not have the revenue to properly cover if you’re going through a slow month or two. The repayment adjusts to the performance of your business. However, as a result, the lender is taking a bit more risk on you. i.e. What if every month for your startup ends up being a “down-month”? Well, to make up for that risk, they charge higher interest. 

Lighter Capital for example, explains that “repayment caps usually range from 1.35x to 2.0x”. This means that the greatest amount you’ll pay back, regardless of what happens with your revenue, is 1.35 to 2 times the amount you borrowed. Seems simple enough.

That is the “cap”, which feels good to have a limit on how much you’ll be forced to repay. On the other hand though, if you went into a bank and they informed you that you’d be paying 100% APR on a loan, it may sound somewhat ludicrous. Essentially, you’ll likely be paying a high interest rate, but you’re getting lots of flexibility in return.

You’ll also give up far less long-term, than you would otherwise with equity-based investments from an angel of VC (that is, if  your startup does well).

Paying 2x the amount of the loan seems outlandish, that is, until your startup succeeds and you compare it to equity. 2x on a $500,000 RBF loan that helps you scale is certainly hefty, but it’s nothing compared to 20% of equity in a company that ends up being worth $10M. Instead of paying $500,000 of effective interest, you’re giving up $2M in equity at the exit (in this scenario at least). Those numbers obviously get even more dramatic if your company grows beyond that and becomes worth more. Imagine having a $50M startup, giving up $10M in equity – all when you could have taken out a $500k loan and paid a “measly” $500k in interest back on that over time. It kind of hurts to consider.

Revenue-based Financing is non-dilutive.

Simple. You’re trying to attract the best talent. If you have more equity on your cap table, you have more flexibility when creating compensation plans for potential co-founders or employees.

Save yourself time.

If RBF is a good fit for your company, you won’t have to spend 4-6 months doing the VC roadshow. Assuming you qualify, there are typically a few meetings, a few emails, and some paperwork and then you’re off to the races. Much better than pitch after pitch, and then driving the VCs to a close.

The obvious caveat: All of this only works if you are generating revenue.
It may be obvious, but let’s be explicit. If you’re super early-stage and don’t have revenue, RBF will clearly not be a fit. You then may have to go the angel / pre-seed route.

See what we’re working on as it relates to revenue-based financing over at Bootstrapp. I also plan to keep digging deeper into this subject moving forward so stay tuned and let me know if you’d like to see anything else in particular.