Venture capital is a popular source of capital for early-stage startups, but it’s definitely not the only one. Debt is an increasingly popular alternative, as is non-dilutive, revenue-based financing.
So, we invited Accel Partner Arun Mathew, Clearco co-founder and president Michele Romanow, and Pipe co-founder and co-CEO Harry Hurst to TechCrunch Disrupt 2021 last week to discuss the various ways companies can raise capital and which might be the best avenue for startups. (Hurst unfortunately had a power outage so was not available for the entirety of the panel).
ClearCo offers revenue-based financing and Pipe has built a trading platform that matches investors to startups with predictable recurring revenue. Both companies have raised large sums of venture capital themselves, some might say ironically. But Romanow and Hurst were emphatic in their belief that venture funding and other forms of capital don’t have to be “mutually exclusive.”
“I actually think the biggest companies in our portfolio are broadly using multiple, different pools of capital,” Romanow said. “I would encourage you to do your research on what type of capital is good for which particular stage of the company you’re in, and which particular purpose you’re using it for. And if you do that, I think you’ll find that you’ll end up being a lot less diluted at the end of the day. And you’ll actually find more leverage over time that will allow you to scale a lot faster.”
Mathew argued that the majority of startups are actually not a great fit for venture investment. “Venture investment is expensive, and depending on who you raise from, it comes associated with certain expectations,” he said.
Romanow pointed out that whether a founder should opt for venture capital or other types of financing largely depends on what they are planning to use the money for. For example, if a startup were looking for capital to spend on inventory and advertising, then venture dollars wouldn’t be the best fit. “It really doesn’t make sense to give up valuable equity at an early stage to do something that’s a repeatable and scalable expense with a fixed return,” Romanow said.
Clearco, she said, aims to help companies by forging revenue-share agreements, which Romanow emphasizes is very different from debt. (The company earlier this year raised $215 million just months after becoming a unicorn.)
“If you do not pay us back, we do not bankrupt your company,” she said. The company charges a flat fee. For example, if it gives a startup $100,000, it expects to be paid back $106,000.
“With that, we have seen an incredible surge of e-commerce brands, mobile apps and SasS companies come to us,” she said. Clearco has deployed more than $2.5 billion in the last two years to more than 6,000 different companies.
“We’re very bullish about some of the categories that haven’t traditionally got as much funding,” she added. “We just think that you should think about what you’re spending the money for, and maybe use cheaper capital for those repeatable expenses.”
For other companies, debt might be more attractive, which is where firms such as Architect Capital come in, while startups who want credit can turn to companies like i80 Group. Fintech unicorn Pipe was founded in September 2019 to give SaaS companies a way to get their revenue upfront by pairing them with investors on a marketplace that pays a discounted rate for the annual value of those contracts. Its model has since evolved to also serve non-SaaS companies that have predictable, recurring revenue. The startup reached a $2 billion valuation earlier this year after a $250 million raise.
Mathew also urged founders to strongly consider their aspirations and the dynamics of the market they are in and “whether that really deserves venture investment.” Basically, he believes, if a company is in “the right category with the right team and going after a big enough opportunity,” then a venture investment might make sense.
Referencing an article on TechCrunch titled Understanding the Mendoza Line for SaaS growth, Mathew points out that for SaaS companies, in order to get to $100 million in revenue and scale, they need to have a “market that’s big enough.”
“It means that you have to be investing for growth, typically. And that usually means that at an earlier stage — at say, $5 million, $10 million, $15 million, $20 million a year, you’re growing at a far faster rate than you are when you are at $50 million, $75 million or $100 million or more,” he said. “But if you haven’t got there yet, check out that article from a couple years ago, because I think it lays out a very clear framework on how to think about raising money at different stages of growth.”
And just because an investor turns you down once doesn’t mean you should write them off forever, he said. Accel, Mathew said, aims to be very candid with its feedback. “In fact, some of our best investments have actually been from saying, ‘No, not right now, but maybe down the road after you prove x, y and z,’ to the founder and then revisiting,” he said.
When it comes to venture funding or other alternative financing options, misconceptions abound. For Romanow, one of the biggest misconceptions around what her company does is that it is the same as debt. “If you don’t pay back your debt holders, they own your business,” she said. “And so that’s actually a lot of risk, and you have to be pretty late stage to consider doing that.”
For Mathew, one of the biggest misconceptions revolves around traction: “At Accel, we sometimes invest before there’s even a product, before there’s even any traction,” he said. “And we invest basically on a business plan and a vision of a founder, or a couple founders, going after a big market opportunity.”
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