Venture Debt Grabbing the Headlines, Is It Warranted?
Perspectives and quick takes from Bigfoot and our community of SaaS operators and investors
Thanks for joining me for the second Bigfoot Bi-Weekly Roundup. We received a ton of great feedback on our first send. This week we have:
Venture debt grabbing the headlines.
Data from our latest poll and new questions for operators and investors.
Ecosystem perspectives from the team at Big Band Software
If you enjoy what you read, we'd appreciate you sharing our insights with your network!
Venture Debt: So Hot Right Now or Going Up in Smoke?
Seems everywhere I turn these days, there’s another article on venture debt or a conference on venture debt or some new person who has yet to do a venture debt financing opening on venture debt.
Takeaway: Now is the time for everyone to raise a venture debt fund. (kidding)
I listened to part of a talk with the SVP of Venture Debt and Startup Banking at PacWest Bank (find it here).
Here are a few takeaways:
Many banks, especially those with venture deposits, now say, “What’s next?”
The lens hasn't changed for qualifying those who get or don't get venture debt. "Fresh Equity from great sponsors is the key."
"Debt is still available, typically around 20-30% of equity raised."
Nothing all that earth-shattering, but what about that fresh equity…
to unlock that “venture debt”…
I’ve been saying recently that venture debt is not really a thing right now, given how tightly coupled (100%) it is to venture equity financings, which are, of course, dramatically down and have been for 3 quarters now:
US VC Deal Activity By Quarter
US Venture Debt Activity
You literally cannot provide venture debt unless there is fresh venture equity alongside it (let’s call fresh raised within the last 4 months). So, I just don’t really think much true venture debt deployment is happening right now, and it won’t be happening until venture equity financings come back online. So, can we stop talking about it so much? There’s really not much happening other than Stifel and HSBC trying to be SVB and some new debt funds being raised that are classed as venture debt.
There is lending being done right now and it’s for two primary purposes, both of which are large:
Refinancing existing debt companies took over the past 12-36 months (there’s a ton of that in the market) and/or
Replacing equity that is not being deployed, debt serves as the growth capital.
Neither of these is venture debt lending, so let’s stop acting like it is.
Bigfoot Capital offers growth-oriented loans for B2B software companies with $2M- $20M in revenue. We pride ourselves on partnering with companies and their stakeholders to provide a capital partnership that comes with stability and support.
If you operate or support a B2B software business and want to learn more about alternative capital options that preserve equity, get in touch with our team today.
Deal Maker Perspectives: Big Band Software
Guest Post From an Ecosystem Peer
Thanks to Brian Parks and the team at Bigfoot Capital for the chance to share an intro of our new firm, Big Band Software, as well as a few thoughts on what we’re seeing and think founders should be aware of as we enter the market buying great SaaS businesses like the ones Bigfoot Capital has supported.
Although Big Band is a new firm, our principals have a lot of (referenceable) buy-side experience (over 45 acquisitions in the last decade), and our investors have strong roots in software as well - including Dan Martell’s SaaS Academy and software private equity firm ParkerGale. We launched Big Band as a holding company this year to focus on providing short transition cash exits for great SaaS founders who either don’t want or aren’t a great fit for the cash-light, long transition deals preferred by funds.
Thoughts on Managing for Growth and Profitability
In our view, the days of the ‘blind ARR multiple’ for all but the highest growth SaaS companies have passed and were a reflection of historically low-interest rates. Valuation today is in flux - and we’re feeling it’s more in flux this spring than in the winter. It’s still critically important to unlock potential value with revenue growth to open up new sets of potential buyers (our floor is $1M ARR, by the way), but we also think a blended approach to profitability and growth can reduce the risks of a forced sale if churn ticks up. And we also think that having a solidly and sustainably profitable business, whose team and customers all are happy within the context of profitability, is important to reduce the risks of a forced sale and prove your viability to a large set of both strategic and financial buyers.
Why?
Strategics will have a harder time making purchases that aren’t cash flow positive - or accretive to GAAP earnings.
Most financial buyers are at least somewhat sensitive to changes in interest rates and bank covenants (both are tougher this year).
At Big Band, we always look at the ‘Rule of 40’ - profitability % plus growth % - for the businesses we acquire, and we think it’s a great time for founders to think similarly about their goals for the performance of their businesses in 2023 and beyond. To reiterate, the days of blind ARR multiples may be behind us, so planning for an exit means keeping one eye on profitability and one eye on growth.
Asking the Right Hard Questions from Potential Acquirers
Within the context of a more strained M&A environment, we think it’s important for Sellers to know that it’s ok to ask hard questions of potential buyers. In short, not all IOIs and not all LOIs are equal in terms of the buyer’s intent and ability to close. These are some of the important questions we hear from smart founders and bankers talking to us about opportunities before we present an offer:
In order to close, what if any financing approvals/bank approvals do you need?
In order to close, does your board need to approve the transaction? Usually, this is a yes, and if so then knowing exactly what awareness the BoD already has is important in discounting the likelihood to close for an offer.
In order to close, what are the most important due diligence items? Not just the standard legal and financial bits and bobs - that is, not the confirmatory laundry list - but what are the questions that are still open at all about the opportunity?
Do you have references from people who have sold you businesses in the past?
🔊 Bigfoot Quick Takes 🔊
GET HEALTHY!
Take a cue from publicly-traded companies, and drive some cash flow. It truly is doable.
Solid branding from Founder Collective
They give these to companies they invest in which is clever and sound CYA. “We clearly warned you our capital could have consequences. Remember the stickers?”
Insights From Our Ecosystem!
Thanks to everyone that participated in last edition’s polling, results are below but first:
🚩 Operators 🚩
🚩 Capital Providers 🚩
Last week’s poll results:
Capital providers/investors:
How many investments did you make in Q1?
43% of respondents did not make any investments.
43% of respondents made 1-2 investments.
14% of respondents made between 2-5 investments.
What was the average deal size?
40% of respondent’s deal sizes were between $1M-$5M with the remaining split equally across the other size ranges.
Operators:
How much capital did you raise in the past 12 months?
63% of respondents did not raise any capital in the past 12 months with the following breakdown.
13% raised between $500k - $2M.
6% raised between $2M- $5M.
19% raised $5M.
Please note that this is coming from a limited sample size.
Contribute / Get in Touch
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