VENTURE DEBT REPORT: Which Venture Debt Firm Offers Best Deal For SaaS CEO's?

...and what all the debt terms actually mean.

If I Offered You 6x Your Current MRR in Cold, Hard, Non-Dilutive Cash, Would You Take It? Venture Debt Firms Hope So.

Some founders don’t know how venture debt works. For those that know about it, do you understand the difference between a MRR based loan and Revenue Based Financing?

What ARR minimums do you need to qualify for capital that costs you less to use?

What’s the difference between an MRR credit facility and a Growth Equity Term Loan?

When does a repayment cap of 1.5x actually hurt you when you calculate the effective interest rate?

Do you (CEO) have to personally guarantee this kind of debt?

Do you have to raise VC in order to use Venture Debt?

We’ll answer all of these questions with examples below.

The most common use case I’ve seen for founders using venture debt instead of equity is to buy themselves a little more time to grow valuation before their next traditional equity raise. This is sometimes called a “bridge loan”.

Founders that want full control of their company, with margins that can easily support a debt payment and unit economics, like low churn, that de-risk the loan from the lenders side will also use this kind of debt.

Venture Debt Deals take 2 main forms:

A MRR Based Loan is a loan where the loan value is calculated as a multiple of your current MRR and repayment is tied to an interest rate, usually 10-14% and an amortization schedule. Minimum ARR ranges from $1.8m to $6m for this sort of deal. You might also hear these called “Term Loans”.

For example, if you’re doing $500k/mo in revenue with a lender who offers 4x your MRR, they’d be offering you $2m in cash today.

We will talk about how you pay the lender back principle and interest later.

Revenue based financing is a loan where the loan value is calculated as a multiple of your current MRR and repayment is tied to a % of your monthly revenue (instead of a set interest rate) and a repayment cap.

Founders like this especially if revenue is not smooth. Because repayment is tied to a % of gross receipts that month, if you have a down month, you don’t have the burden of a big fixed payment. The payment fluctuates (ex 7% of your monthly gross receipts).

This is more common for smaller companies where ARR is between $180k and $2m. Because there is more risk with a smaller ARR company, the cost of capital is typically higher here but still sometimes a better option than selling equity.

You might also hear this called “royalty based financing”.

Do those two loan types make sense?

Comparison of 8 Venture Debt Firms:

This chart highlights how much ARR you need to be doing to work with these different firms.

The max MRR multiple gives you an idea of how much money they may lend you pending their due diligence.

Each of these firms have their own nuances, but the charts below showcase their “average” type of deal.

Sample Terms For a $100k MRR Company:

Lets say you’re reading this doing $100k in MRR. You’re revenue is too small for a MRR based loan, so you look at Revenue Based Financing options.

The % of gross revenue you pay back each month varies widely based off three major factors. The first is how much you take, the second is how long you have to pay it back (usually between 1 and 4 years), and the third is how fast you grow revenue.

If you take less than the max loan value, lets say just 2x your MRR or $200k, and you want to pay back in 4 years, you have fast growth, your % might be lower.

Revenue percentages are low with lower loan value ($200k), longer term (4 years), and faster growth.

If you take the full max loan value, lets say 8x your MRR or $800k, and you want 2 years to pay it back, you have slow growth, your % will be higher.

Revenue percentages are higher with higher loan value ($800k), shorter payback (2 years), and slower growth.

An element of both of these we haven’t discussed yet is the repayment cap.

Lets say you take $400k, 4x your MRR, and you want to pay back over 4 years. The repayment cap (interest and principle) will be in the 1.3-1.8 range.

• At a 1.3x cap, you’d pay $400k in principle plus $120k in interest. ($400k*1.3x = $520k).
• At a 1.8x cap, you’d pay $400k in principle plus $320k in interest. ($400k*1.8 = $720k)

Here where this capital can get expensive. If you do $400k over 4 years with a 10% revenue payment each month on a 1.6x cap, but you decide after 2 years to pay off the whole thing, you still have to pay up the 1.6x cap which drives your effective interest rate through the roof.

Karl Pichler who leads the debt team at Scaleworks, offers the following alternative:

“Our payoff multiple is time dependent, i.e. for a 1 year loan term you pay 1.2x, for 2 years 1.3x, for 3 years 1.4x, for 4 years 1.5x.   If you go into this with a 4 year expectation but then things change and you grow much faster than anticipated and you reach 1.3x within 24 months, you are done. This creates much better terms for the borrower and gives them ultimate flexibility.”

Another option you might start to think about is MRR Based Loans.

The below chart is an example deal on a company doing $300k in MRR:

Imagine getting a $1.2m check today from River SaaS Capital. Over the first 12 months, you’d pay $120k in interest for that money, leaving you net ~$1m to re-invest to drive growth.

If you think you can drive more than $30 or 40k in new MRR from this $1.1m, you would rationally argue this makes sense because the growth covers the interest + principal payments from months 12-48 (or however long the loan is).

$40k in new MRR means $480k in new ARR. How much does your valuation increase with another $480k in ARR? You could conservatively argue, at 2-3x valuation multiple, this just added $1m to your valuation so you’ll take less dilution next time you want to sell equity.

My charts above generalize many of these terms for the sake of helping us all compare options in an apples to apples way.

Once you engage with any of these firms, some get flexible.

Wendy Jarchow, the Chief Investment Officer for River SaaS Capital, said the following:

“We are very similar to SaaS Capital, with less revenue threshold. We do not require VC backing as we do not take warrants. We offer term loans with payments tailored to borrower’s cash flows.”

When I asked about payback, she continued,

“Our payback usually works out to be around 1.6x cash on cash return over 48 months. But again, we strive to be very partner-oriented and will work with our borrowers to come up with the most appropriate payment schedule.”

On MRR based loans, you also want to consider if you want a credit facility where you can pull money down as you need it, or a traditional term loan where you pull all the money down at once. Many firms offer both.

“Assuming a company had $250k in MRR and the other metrics looked good we could do ~$1.5mm but could expand as the company grows its customer base. Our loans are 4 year term with 12-18 months interest only followed by a 30-36 month straight-line amortization,”

said James Thwing of Recurring Capital Partners.

Twing continued,

“Interest rates are typically in the 10-14% range depending on the company and the risk profile. So in that first interest only period the payments will be lower, which we feel is advantageous to the Borrower, by not tying up as much cash flow.

Then when the amort. starts, the Company will (hopefully) be larger and with a better financial profile and better suited to service the amort. payments.”

Twing and Recurring Capital Partners have done 15 investments to 10 companies to date out of their $32mm first fund.

Rounding out the group, TIMIA capital CEO Michael Walkinshaw described their structure to me:

“Our payment stream is generally structured as "greater of minimum payment and % of revenue payment (aka royalty payment)". 

It wasn't clear what he was referring to, and when I asked to clarify he described,

“There is very limited chance that the % of revenue payment will kick in during the first 3 years. The minimum payments dominate for year 1 to 3. The minimum payments are stepped over time to allow for leaving more cash in the company in the early years and larger payments in the back-end years when revenue is larger (and company can handle payments). 

So early year(s) payments will actually be below the interest rate (negative amortization), year 2 and 3 generally move to covering interest and a bit of principal, and year 4 to 6 move to heavy payoff of principal. The variable part results from the outcome of when the % of revenue payment takes over from the minimum payment, and thus whether we get paid out over 5.5 years, 6 years, 7 years or 8 years. We see this longer term as giving the entrepreneur more flexibility.”

We continued to discuss terminology related to secured vs. unsecured loans.

“One of the terminology issues we struggle with is that "Revenue Based Financing" is generally (up in our neck of the woods) not a secured loan. It is more of a royalty on sales contract, unsecured. So we make the distinction of our facility being a loan, because we seek security. That said, our payment stream does have the flexibility of Revenue Based Financing, by allowing for a range of outcomes in terms of payback period.

We mostly fit the Revenue Based Financing (ignoring the security issue), given that we : 1. are not a line of credit, we are a term loan. 2. Our payment stream is "partially" tied to revenue growth (though not totally) and our return is capped at a multiple, 4. Also, we do not require VC backing.”

Lastly, more traditional banks like Silicon Valley Bank also offer a variety of loan options. When I sat down with Simon Keyes in SVB’s NYC office, he shared,

“We can do a 3x MRR line of credit and sometimes do 4x or 5x depending on structure. Our capital is typically cheaper given that we are a senior bank and take a lien on assets.”

When I pushed him on typical interest rates and warrants, he replied,

“Interest rates are typically in the 6% range and we may take a small warrant component in the 10-20bps range or have a covenant”.

In addition to their MRR line of credit product, SVB also offers Growth Capital Term Loans usually 20-30% of the size of the most recent equity round from institutional VC’s topping out at a $5 million loan limit.

Interest rates on that product are about 6%, no covenants, and a warrant component of 10-25bps.

In summary, I encourage you to look at all of these finance products to get leverage next time you go out to raise traditional capital.

It’s helpful to know that if you don’t get the valuation you want, or you’re not happy with the dilution, or the round falls apart when your lead pulls out, that you’ll have other non-dilutive alternatives to fall back on.

These firms all move very fast and can usually get a deal done 1-4 weeks after meeting.

A CEO who asked to remain anonymous took an investment from Venture Debt firm River SaaS Capital recently and describe the experience:

How would you describe the due diligence and documentation process working with a lender such as River SaaS Capital when compared to an equity investor?

Our due diligence with River SaaS Capital was a thorough process, which of course is necessary anytime lending money is involved. However, it’s nowhere near as long or time-consuming a process as the one we went through to get equity funding.

The documents for River SaaS were far easier for us than documents in equity funding. estimate all fundraising paperwork in inches, so I’d guess that I have a ? inch thick manila folder for our lending documents. For our equity raise, I have a 2-inch binder prepared by lawyers. That’s just the nature of the game when you’re talking about giving up a stake in your company. My legal bills for equity financing were $30K. We probably spent $5k for River SaaS deal.

Now that you have an understanding of how venture debt works, start looking at these firms for potential deal terms:

1. Lighter Capital is based in Seattle Washington, was created in 2010, has done 260+ investments with 13 exits.
2. Scaleworks is based in San Antonio Texas, was created in 2015 by founders and ex-Rackspace executives.
3. SaaS Capital is in Cincinnati Ohio, was created in 2007, has done 27 investments with 7 exits.
4. River SaaS Capital is based in Ohio, was created in 2016, has done 2 investments.
5. TIMIA Capital is based in Vancouver Canada, was founded in 2015, and has done 11 investments with 4 exits.
6. If you’re a larger ARR company ($10m+), look at options like Hercules capital which is a public company that exclusively does debt deals, many with SaaS Companies.

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This report was taken from this magazine written exclusively for SaaS CEO's, Founders, Investors, and PE firms. The magazine includes 100+ ARR data records of private B2B SaaS companies along with other exclusive data points. Click here to get the free magazine.