In this challenging fundraising environment, more startups than ever are turning to alternative finance solutions such as fault.
Despite the negative connotations associated with debt, as TechCrunch’s Kyle Wiggers recently noted, a startup shouldn’t view it as an act of desperation during a downturn.
Companies with high recurring revenue and visibility into future performance — like SaaS startups — can particularly benefit from leverage.
Enter start-up path. The Austin-based company recently secured $145 million in its own debt and equity financing to help B2B SaaS founders grow their businesses without diluting ownership. Founder Nathan Latka witnessed firsthand the painful process of giving up too large a stake in a startup he founded years ago – an experience he says eventually led him to start Founderpath.
As the market has changed dramatically in recent months, Founderpath has seen more demand than ever in 2022, according to Latka.
According to Latka, the company has provided over $60 million in capital to 130 SaaS founders since launching in January 2020. In the last 12 months alone, the company has committed $50 million, and more than half of that in the last four months.
So how does it work? Founderpath claims it allows founders to receive up to 50% of their annual recurring revenue (ARR) in cash up front. It asks companies to connect each subscription system they use to its own platform. Once Founderpath has visibility into a startup’s finances, the company can receive an offer “in less than 2 to 3 minutes,” Latka says.
Founderpath focuses on bootstrap SaaS companies with monthly recurring revenue (MRR) of at least $10,000, with the typical company profile generating between $1 million and $5 million in ARR.
Now, Founderpath isn’t the first (or last) company looking to help SaaS companies with non-dilutive funding. It competes directly with Pipe — a marketplace that connects companies with predictable, recurring revenue with investors valued at $2 billion last year — and Capchase, out in July 2021 $280 million secured into new debt and equity financing and has since raised $80 million in equity and secured an additional $400 million in debt.
What sets Founderpath apart in the increasingly crowded space lies in its terms, Latka believes. For example, he says Founderpath offers founders up to 12 to 48 months to pay off their debt, no prepayment penalties, and no warrants. Typical terms, according to Latka, are $500,000 repaid over 24 months at a discount rate of 7-12%. Competitors typically offer less payback time and higher rates, he said.
“There are no additional fees and the money is transferred overnight,” Latka told TechCrunch.
As mentioned above, the CEO strives to help founders avoid making the same mistakes he made as a young entrepreneur. After starting his own SaaS company as a 19-year-old student at Virginia Tech, Latka thought he was “on top of the world.”
“I upgraded it to $1 million in ARR,” he recalls.
Then Latka received a cold email from some VCs and raised $2 million in 2014 at a post-money valuation of $10.5 million.
“I got really watered down and sold the company in 2015,” he said. “It was a terrible sale – at less than 1x ARR. I owned less than 40% of the company on a fully diluted basis.”
That same year, Latka launched a podcast and has interviewed a SaaS founder almost daily ever since — to date, he’s recorded 2,500 episodes that have had 18 million downloads, he said.
So often when he stopped recording, some founders spoke to Latka about the possibility of going into debt. It opened up a new world for Latka, who said he “quickly realized that debt is the secret to staying in control of his SaaS business, raising capital quickly, and avoiding VC dilution.”
As he began helping founders negotiate debt, Latka came to the conclusion that many of the terms of debt financing were not founder-friendly, and things like massive prepayment penalties, 1% to 2% warrants, equity kickers, and “repayment caps that it really hard to figure out what the real interest rate was.”
Other things these contracts included? Legal fees and agreements that founders could take money but must keep a certain amount liquid in their bank — “dead money” that Latka says can’t be used to grow the business.
So in 2018 he started using his own money to write debt checks for SaaS companies. He found that without software, “it was really difficult to track all these debt investments,” so he built a tool that gives founders a way to connect their subscription billing account to his platform.
“If you’re running a SaaS company and you have 100 customers paying $50 a month,” Latka needed a way to see that, he told TechCrunch. “In order for me to be comfortable in a debt deal, I needed to understand who your customers were and what your earnings were so I knew what I was lending on. This has allowed me to track these deals more closely and provide founders with faster and more accurate offers for new debt.”
By 2020, he had officially launched Founderpath to formalize its lending operations. Today, the company has just eight employees – a fact Latka is proud of and says it has operated in a capital-efficient manner. So efficient that it reached profitability last year, he said. And this podcast? It serves as a fantastic distribution channel.
“We’ve grown our earnings by 10% to 20% every month for the last six months,” he said. “Based on our growth over the past 30 days, we will provide $100 million this year and $1 billion over the next 24-36 months.”
With today’s changing environment, Founderpath has specialized in helping not only Bootstrap founders, but also those that Latka describes as “capital-efficient SaaS founders who raised less than their ARR and were looking for bridging rounds.”
“We’re looking at CAC (cost of customer acquisition), customer churn, average revenue per customer, customer lifetime value,” Latka said. “We only focus on B2B SaaS founders because we need proof that they can pay us back since we don’t take equity.”
In raising its own financing, Founderpath turned to Forbright Bank, with $8 billion in assets under management, to lead the $135 million debt deal and Singh Capital Partners (SCP) to provide equity financing in the amount of 10 million US dollars. Other supporters include the founders of companies such as ZoomInfo, Brandwatch, Truebill and Par Tech. In total, the company has raised $15 million in equity.
SCP he said is a multi-family office with over 800 LPs who are SaaS executives of public companies, current or former founders and family offices.
Nicholas Ricciardella, an associate at SCP, said the company has a number of LPs that manage public market portfolios and watched public SaaS multiples compress in real-time months before they started showing up in private markets and VC.
“Using this feedback, we corrected course much earlier than our peers and often became the vanguard of bad news when we gave founders terms that would now be considered ‘market’,” he wrote via email. “With all the opposition we received from founders, coupled with the slow decline in valuations as more and more VCs began to match their underwriting to public market valuations, we recognized that non-dilutive financing options would be on the rise, as they allow SaaS for founders to avoid having to fund their companies at lower valuations (ie more dilution) than previously anticipated.”
He described Founderpath’s underwriting as “superb” and said SCP was also impressed with the firm’s capital efficiency and client acquisition strategy.
San Antonio, Texas-based Active Capital, which led Founderpath’s $5 million seed round in October 2021, was a fitting backer. Founder and CEO Pat Matthews told TechCrunch he’s known Latka for over a decade and even invested in his first startup.
“This company wasn’t doing too well…but even during a time of hardship and hardship, I’ve been more and more impressed with Nathan’s character and his unique talents,” he said.
Additionally, Matthews himself spent the first half of his career as a bootstrapped SaaS founder. (He founded Webmail before joining Rackspace).
“Although I now run a venture capital firm, I believe the future of small businesses will consist of tens of thousands of hard-working SaaS founders who never want or need to raise VC,” he told TechCrunch. “Founderpath is creating an entirely new funding avenue for these types of businesses, and the company’s focus on Bootstrap SaaS founders allows them to tailor the right financial tools and capital products for these types of businesses. I think Founderpath is a great example of verticalized fintech for a fast growing sector in the world.”