The decline in the venture capital deal market is proving to be a boom time for venture lenders.
Until earlier this year, it was relatively easy for startup founders to secure new capital at high valuations for their businesses. But in today’s bearish conditions, it is now common for investors to give them lower ratings next to stricter terms of agreement.
The result has been that startups in need of extra cash are turning to less punitive funding sources. such as risky debt and other forms of non-dilutive financing.
“We have become one of the most attractive [financing] options,” said Harry Hurst, co-founder and co-CEO of Miami-based Pipe, a marketplace for selling and buying recurring income streams. “It’s show time for us now. “
Revenue-based financing has become a particularly attractive capital alternative for startups with contractual or predictable sales models. Companies that lend seed capital against recurring revenue from startups say they have seen an increase in demand since the onset of the recession.
Fintech startup Capchase is another provider of non-dilutive capital for software startups. Miguel Fernandez, co-founder and CEO of Capchase, said his company could play an important role in helping startups avoid price drops.
Startups now have two paths to reach their pre-correction ratings, he said: they can grow as fast as possible or slowly, but for a longer period of time.
“Both options need more money,” Fernandez said. “Companies can take on risky or capchase debt in the hope that it [will help them grow] in their valuation.
Capchase has raised more than $760 million in debt and equity since its inception two years ago and was valued at $780 million earlier this year, according to data from PitchBook.
Capchase and Pipe say their offering is superior to traditional venture capital debt because their lending decisions are data-driven and therefore can be made quickly while receiving funding from venture capital debt providers. could take several weeks. Additionally, once a business’s revenue increases, its line of credit automatically increases.
“Each customer, on average, grows about 60% faster with Capchase than before us,” Fernandez said.
Indeed, businesses that invest their loan in revenue growth receive additional funding, creating a virtuous cycle of growth.
When Picket, a Seattle-based residential property management platform, was looking to improve its $7 million Series A with venture capital debt earlier this year, the team gathered quotes from four vendors. of venture capital debt, including Capchase.
“When you looked at the total cost of capital, Capchase offered the most competitive terms,” said Shaun O’Connor, chief financial officer of Picket. “And as we continue to grow, Capchase grows with us.”
Startups and seed-strapped companies of all sizes are taking seed capital from Pipe, Capchase, and Founderpath, an Austin-based company offering a similar product.
Pipe, which was valued at $2 billion last year, says it provides capital to businesses with as little as $100,000 in annual recurring revenue, to publicly traded companies with more than $1 billion. of income.
Although the cost of borrowing from these lenders may increase in a rising rate environment, Capchase and Pipe said the average cost of using these solutions has not increased since last year. Capchase fees, which are similar to an interest rate, range from 4% to 10%.
However, Matt Burton, partner at QED and investor in Capchase, said via email that alternative lenders are increasingly demanding. “The number of loan applications has increased significantly, but the risks are higher in this rising rate environment, so approval rates have declined.”
Related listening: How non-dilutive financing could reshape venture capital
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