Debt Financing for Startups?
Hi all, left the finance world in Q1 this year to start my own company. Over the past few months have been run rating at about $2mm (~40% operating margin) and continuing to scale. All bootstrapped by myself thus far but looking to turbocharge growth by taking on outside financing. Have spoken to a few traditional banks, all of which have wanted to see at least 2-3 years of operating history. Given that the operation is already CF positive and I'm confident I can scale it to $100mm+ revenue within the next few years, I'd prefer to not give a significant piece of the upside to a VC. At this stage, are there any financing options aside from VC? Thanks.
Congrats on successfully bootstrapping so far. Yes, the industry term is Venture Debt, check out Silicon Valley Bank or their competitors. At $800k of gross profit you may be on the smaller side for some of these guys but cashflow positivity could negate that
Depending on where you are based, you may qualify for some government tax credits / grants / financing schemes designed to encourage innovation. Canada and most of the EU are great for this, as are certain US states (usually ones not thought of as startup hubs eg the Midwest)
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All non-recourse.
Check out Flow Capital
Others have given some good names for venture lending, but I'll share a couple thoughts on the broader software lending space (assuming its a software startup). At $2M of ARR, you're currently a bit sub-scale for a lot of groups, but as you clip key growth milestones ($5M/$10M of ARR), that opens up your universe of potential lenders pretty substantially. Cash flow positive is good; EBITDA positive is better (assume some of your cash flow generation is due to working capital). Gross / net revenue retention of high 80%+ / 100%+ is very attractive. Multi-year contracts are better than single-year, and once you get a couple of contract renewals under your belt and can demonstrate a track record of stable-to-improving pricing on renewal, that's a pretty compelling story.
Venture-y / growth-y debt might come with some warrants attached depending on who you're talking to, but it won't be nearly the dilution you'd see from a traditional VC (think mid-single digits). Happy to answer any other specific questions.
Agree with size but as you scale I know that there are banks who finance cash burn recurring revenue deals based on a harvest analysis. Off the top of my head I know SVB, ally, BMO, Wells, PNC, and some direct lenders like Antares and the like will do these type of deals albeit with larger clients. Perhaps some of those spots are willing to work with smaller companies but I doubt it’ll be cheap capital
Yeah, didn't mean to imply that wasn't the case, just that, all else the same, a software company with positive cash flow is going to get more bites than one that's negative. There's a good handful of direct lenders that play in the space. I'd say that the loans aren't really "based" on a harvest case but being able to demonstrate the ability to be able to service debt by flipping off the "growth mode" switch is usually part of the underwriting.
Not software - DTC consumer space. Nonetheless very helpful. Thanks.
PM me and I can help. LMM DTC/eCommerce is all we do.
Can’t add much but wanted to say your post gave me a semi. Imagining quitting my job and hitting $2M in revenue with 40% margins in under a year and my head is spinning.
Big props to your success. What type of business? Were you working on it before quitting officially? I can’t find time to plan a piss so always amazes me when people working crazy hours balance entrepreneurship with their day job.
Hi,
I help hedge funds and startups raise cash.
Let me know if interested. PM.
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