When it comes to startups and venture capital, founders often turn one question over and over in their heads: “When should I raise money?” It can be hard to get that question to go away, because the answer tends to feel disappointingly vague: “Whenever you can.”
One aspect of that disappointment stems from the fact that every founder wants to feel like they’re in control of the fundraising process. Unfortunately, the reality is that when trying to raise money by selling equity, founders face many circumstances that have nothing to do with them or their company. These can be related to macroeconomic conditions such as interest rates, cyclical market sentiment, and industry trends; they can also be related to microeconomic conditions within the world of startup investing itself, such as the age of a VC fund and how much money a given VC has on hand and available for deployment.
Luckily, there’s a different funding option that’s rapidly becoming viable for many startups – especially SaaS startups – and it’s one that allows founders to better face the vagaries of equity fundraising: debt.
Debt is particularly adapted to growing a SaaS business since it is possible to use data to predict cash flows, the current LTV / CAC ratio, churn rates, payback periods and more. This information gives both lenders and borrowers much better visibility on future results when compared to “traditional” startup forecasting.
Put simply, debt can give your SaaS business fast access to cash that will let you execute and even accelerate your roadmap. At Uncapped, the requirements for accessing a loan are quite straightforward:
- You have at least a 6-month track record of growth and sales using your SaaS model, with a low churn rate;
- You have at least €100K in current MRR;
- That’s it! In a matter of days, the cash can be in your account – at Uncapped, the process can be completed in less than a week.
In addition to a speedy process, debt is an attractive option for founders because there’s no ambiguity involved. The terms are clear from the start: you know exactly how much cash you’ll receive, how much you’ll have to pay back, and your upcoming payment schedule. Plus, if things go well and growth accelerates, you can easily unlock more cash that corresponds to your new, higher MRR. In that way, debt can become a powerful, ongoing solution for fuelling growth.
Another nice characteristic of debt is that there actually is a good set of guidelines responding to the question of “When should I access cash by using debt?” Let’s look at some common situations that can be well-served by debt, including examples from happy Uncapped customers who have used debt to put their SaaS companies onto solid financial footing.
First, there’s one sine qua non condition for using debt to fuel your business:
You’ve already found product-market fit (PMF).
Be brutally honest with yourself. If you don’t have PMF, adding debt to your business not only doesn’t make sense, it’s extremely dangerous. This is why the one big thing that Uncapped looks at when evaluating your application are your sales and financial accounts, as these are the best indicators of having achieved PMF. If your sales are fluctuating massively up and down, the implication is that you haven’t yet found the right product that solves a real problem for your target market. If you’re steadily growing month-over-month, you likely have PMF that will now allow you to scale the company by reaching more and more targets and converting them into customers. In any case, it's important to focus on integrating new solutions in the form of a hybrid cloud for more SaaS security, adapting new digital strategies for marketing, and trying out new types of campaigns.
Once you have PMF, there are a variety of situations where it makes sense to fuel your SaaS business using debt.
You’re ready to expand your target market
The beauty of a SaaS business is that it is largely unconstrained by national borders. Although local specificities must always be taken into account, many SaaS businesses are solving problems shared by many potential customers across many geographies.
Brand24 is an excellent example of executing for growth by leveraging debt. The Poland-based team had developed a media monitoring tool that could be of interest to brands around the world. By focusing on medium-sized brands, Brand24 had a target market of literally thousands of businesses that were located in almost every country on earth.
Using a series of Uncapped loans, Brand24 has been able to expand their team and boost customer acquisition to reach those businesses. The results? 3500+ clients in 120+ different countries, all acquired without any dilution.
You know how to scale your marketing spend
Whether you’re concentrating on paid, earned, owned or shared marketing (or, even more likely, a combination of all four), you should be continually gaining knowledge about which channels are most effective and how to best utilise them.
Still, expanding your marketing operation to take advantage of that knowledge and win more customers typically involves expanding your budget as well. Assuming that you have a positive LTV/CAC ratio, debt can be an excellent way to access the cash needed to boost your growth rate.
Marshmallow provides an example of how to do this well. Their first step was using an initial £100k loan that was aimed entirely at customer acquisition, which led to their revenues increasing by 56% in just two months. They then used a second loan of £650k to further boost their marketing efforts. The result? Not only a significantly increased ARR, but also a valuation in their next equity round that was several multiples higher than was being discussed just a few months before.
You want to lengthen your runway, whether you’re thinking in terms of months or years…
One funding option that many founders have grown to appreciate in the past 15 years is the convertible note, which enables them to have investor cash sent to the company’s account relatively quickly by avoiding the need to conduct lengthy negotiations. (Just as a reminder, with a convertible note the investor receives the right to convert a certain number of shares into equity at the next fundraising round, with the founder receiving the cash immediately.)
Debt can pair very well with the convertible note option, allowing founders to access more cash while also being highly strategic about who they bring into the company as an equity investor.
In some cases, debt can even allow a company to put off the next priced equity round almost indefinitely. That’s been the story so far with cord, where they’ve grown the company to over £3M in ARR without ever selling any equity. By using debt, the company has been able to continually access cash that is reimbursed by their steadily growing customer base.
The takeaway for founders considering the use of debt financing is that debt, thanks to its clear conditions and terms, provides flexibility when it comes to financing growth. Your initial loan has worked out splendidly and you’re ready to come back for round two? Great! Your plans have changed and you don’t need as much as you initially thought? With revolving credit, you’ll only pay fees on the cash you actually use.
So while debt may not be the only financing option you need - after all, there are still many scenarios in which venture capital fits the upcoming risks facing your business –, it is certainly an excellent option to add to your financial toolbox.
Interested in determining whether an Uncapped loan is a good idea for your SaaS business right now? Book a call with our Head of Investor Partnerships, Justin to find out more.