As a business model, SaaS has expanded to epic size. A number of large SaaS companies filed for IPOs last week, and there are now thousands of growing SaaS startups around the world. This scale makes it easier for banks and financial institutions to offer tailored solutions to this market in everything from equity to debt.
We’ve talked a bit about SaaS securitization over the past few weeks, a series of new financial products that use a SaaS company’s metrics to secure its debt (e.g. better churn = more debt available and at better conditions) as opposed to traditional benchmarks like total revenue and age of business. We also did a deep dive with Kentik CEO Avi Freedman on how he approached his recent venture capital debt fundraising and the terms he secured in his five term sheets ( Extra Crunch membership required).
Every SaaS company these days considers its financial options and the trade-offs between equity and debt. But sometimes they just need the money, and the money ASAP. Startups sign contracts with customers that can be paid over a year or more, but they want access to that money now and on the best possible terms. The product that solves this problem is known as the Accounts Receivable line, and you can go to many banks to get them, with all the drudgery of that process.
Or, four founders hope, you’ll head to Capchase.
Capchase is an online platform for quickly withdrawing money from your customer accounts. Startups upload key details of their customer contracts and financial history to Capchase, and the company uses its underwriting algorithms to quickly assess the quality of those contracts and extend a line of debt. The startup calls itself a “non-dilutive revolution” and is headquartered in Boston.
“We target B2B SaaS or ‘X-as-a-service’ companies with recurring revenue, and we target companies around the seed to Series B/C stage with over $1 million in revenue. ARR and at least eight months of revenue-generating history,” said Miguel Fernández, CEO and Co-Founder.
He teamed up with three other founders earlier this year to launch Capchase: Luis Basagoiti, Ignacio Moreno, and Przemek Gotfryd. Fernández and Gotfryd met at Harvard Business School where Fernández was thinking about “optimizing working capital and the cash conversion cycle” after his previous experiences in SaaS companies. Gotfryd previously worked at growth investor TCV in London, where he saw first hand the challenges of raising non-dilutive funds.
Despite its operational beginnings, the company has already quickly raised its own cash. It closed on $4.6 million in venture capital seed funding led by Caffeinated Capital, Bling Capital and SciFi VC, as well as BoxGroup, ONEVC and a number of Angels.
To get money early today, startups often resort to negotiating terms with their clients, offering discounts – sometimes massive discounts – for them to pay the full value of a contract upfront. Fernández saw an opportunity to arbitrate the difference between interest rates and these discounts with Capchase.
From the user’s perspective, after syncing their startup’s financial data with Capchase, they will see a projection of what their track extension will look like after selecting a line of debt, and then Capchase will extend their terms after tracking an underwriting process (“which takes a few hours now, and dwindles very quickly to take a few minutes,” Fernández said). In terms of traction, he said “we are working with about 3-4 clients right now.”
Startups are charged a discount on the full value of their contract, which is where Capchase makes money. For example, if $100,000 is going to be paid by a client over the next 12 months, Capchase can offer the startup $95,000 up front and keep the remaining $5,000 as those payments come in. This discount fluctuates depending on the startup in question and the payment risk of the underlying customer contracts.
Fernández said venture capital debt is often cheaper based on pure interest rates, but once additional elements of these products are added, such as warrants, the simplicity of Capchase’s product will prove competitive for the founders.
Simpler, easier, all-digital financial products are always welcome, and Capchase hopes it will nestle in a suite of new financial products for SaaS founders looking to avoid dilution and extend their cash flow longer.