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Venture Capitalist Firms

Startups and SBA Loans

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Last week Congress passed the CARES Act which provides a vast array of financial relief provisions to people and businesses in the US.

Congress is providing relief to small businesses via a forgivable loan program administered by the Small Business Administration (SBA). The SBA has long been in the business of making small business loans, but the loans under the CARE Act are very different. Here are the primary provisions of these CARE Act loans (cut and paste courtesy of my friends at KE Law):

  • Loan Program Eligibility.  Any business concern (including franchises) as well as non-for-profit organizations, with no more than 500 employees are eligible to receive a single loan under this Act.  The maximum amount of the loan is the lesser of (1) $10M, and (2) 2.5 times the monthly payroll costs determined over a specific testing period.  No personal guarantees or collateral will be required for loan eligibility under this Act.
  • Loan Proceeds Usage.  Loan proceeds can be used for payroll and other compensation costs, health benefits, insurance premiums, mortgage interest, rent, utilities and interest on other outstanding debt.
  • Loan Forgiveness.  Perhaps the most important element of the Loan Program is its loan forgiveness element.  Pursuant to the Act, borrowers under this Act will be forgiven a specific sum equal to the sum of (1) certain payroll costs, (2) mortgage interest payments, (3) rent, and (4) utility payments that were incurred during an 8-week period beginning on the loan borrowing date.
  • Forgiveness Penalties.  Given the intent of the Act to save American jobs and salaries, the amount of the foregoing loan forgiveness will be reduced by certain factors.  These factors include a reduction in the average number of full-time employees as well as substantially reduction (beyond 25%) in employees’ salaries.
  • Other Terms.  The maximum loan term under the Act will be 10 years (for amounts that were borrowed that are not subject to loan forgiveness), and the maximum interest rate is 4%.  The first payment on any loan under this Act will be for at least six (6) months, but not longer than a year.
  • How to Apply.  Eligible business should seek competent counsel immediately to work on the application, as the loans will begin to be available likely by the middle of April 2020.  Required information for the application will include payroll documentation, tax filings, unemployment insurance filings, proof of payment of payroll taxes, mortgage applications and the like.

So this sounds great for startups, right?

Well not so fast.

The law as written requires “affiliates” to aggregate their employees into a total and that must be below the 500 employee threshold in order to qualify for these loans. And most of the lawyers that I have talked to over the last few days read the affiliate provision in the CARES Act such that any venture capital-backed startup would need to affiliate with all of the other startups that are backed by the same venture capital firm or other kind of investor.

There are many folks in startup land (lawyers, investors, CEOs, lobbyists, etc) who are working with Congress and the SBA to address this issue. Many of the largest employers in small businesses in the US are backed at some level by investors who back many startups, including angels, seed funds, VC firms, and corporate investors.

From what I can tell, based on some work but not exhaustive work, this was not intentional on the part of Congress and there seems to be a willingness to figure this out.

If you are planning on accessing these loans, I recommend talking to a lawyer who is well versed in venture capital and startup law and make sure you are looking carefully at the affiliate provision. And if you have a relationship with your elected officials in Washington, you might want to reach out to them and explain that the Cares Act affiliate rules are problematic.

It is my hope that this “bug” in the law will get fixed over the next week or so. It may be possible for the SBA to address this issue without the need for any more work by Congress and that would be ideal in my view.


USV TEAM POSTS:

Hannah Murdoch — Apr 8, 2020
What We’re Learning About How We Learn

Hanel Baveja — Apr 8, 2020
What We’re Learning About How We Learn

Albert Wenger — Apr 6, 2020
Normalcy Bias: We Live in a Dynamic World (But People Don’t Believe It)

Nick Grossman — Apr 3, 2020
Quarantine Creativity



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Venture Capitalist Firms

Bias: At-Home Film Screening Event

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Amy and I, along with Techstars, were Executive Producers for Robin Hauser‘s film “bias“.

It’s an extremely helpful documentary around understanding unconscious bias. When Robin made the film, she concentrated on examples around gender and race, but the principles apply to all aspects of bias.

I’ve always felt the final wording on the overview captured the film well.

bias is a film that challenges us to confront our hidden biases and understand what we risk when we follow our gut. Through exposing her own biases, award-winning documentary filmmaker Robin Hauser highlights the nature of implicit bias and the grip it holds on our social and professional lives.

Throughout the film, Robin gives voice to neighbors concerned about profiling in their communities, CEOs battling bias in their businesses, and those of us hesitant to admit our own biases. After confronting her unconscious bias, Robin turns to action by engaging with innovative experiments – from corporate strategies to tech interventions and virtual reality – that are reshaping our understanding of implicit bias and attempting to mitigate it.

On Thurday, June 25th at 11am PST (2pm EST) there will be an online panel discussion around Bias. In advance of the panel discussion, you’ll get a link to watch the film online.

Along with Robin, the panelists are Kate Mitchell (Scale Venture Partners), Heather Gates (Deloitte & Touche), and Elliott Robinson (Bessemer Venture Partners).

I appreciate the sponsors – NVCA, Salesforce Ventures, Deloitte, and SVB – for hosting. I’m an enormous fan of Robin’s work (Amy and I also were Executive Producers for her documentary Code: Debugging the Gender Gap) and I learned a lot from both films.

I encourage you to sign up for the discussion and the free screening of the film online. I just did …

The post Bias: At-Home Film Screening Event appeared first on Feld Thoughts.



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Check Out The Top Sessions from The New New in Venture

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If you missed any of the sessions from SaaStr’s New New in Venture, they were pretty awesome.  Catch up here on what’s really going on in venture and fundraising, right now, with everyone from Aileen Lee to Keith Rabois to The Forbes Midas List and more!

These sessions were our highest-rated ever for a SaaStr event so dig into them here and let us know what you think.

The post Check Out The Top Sessions from The New New in Venture appeared first on SaaStr.



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We’re About To See a Lot More SaaS Debt

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Debt for SaaS companies done right is a gift.  Done wrong, it can weigh you down like an anchor.  Few folks have more data than Nathan Latka and he offers up some insights on how to properly leverage up in SaaS. — ed.

Good — and Bad — Types of Debt

Carlota Perez argues in her book Technological Revolutions and Financial Capital that in the early days of a “golden age”, financial capital is necessary to fuel new technology innovation. 

Once that technology is better understood, production capital moves in to drive mainstream adoption of the technology. 

Geoffrey Moore calls this group the Late Majority and the Laggards in his book Crossing the Chasm, a secret bible for many SaaS CEO’s. 

This article looks at the history of SaaS as it relates to financial capital and production capital.

I argue that standard saas metrics make it possible for founders to scale using debt capital (production capital thats cheaper) instead of solely relying on venture capital (financial capital thats more expensive).  

2004 Salesforce IPO Brought Financial Capital to SaaS Founders

With the Salesforce IPO in 2004, we saw the first sign that institutional investors were comfortable with a standard set of SaaS metrics: Churn, sales efficiency, ARPU, LTV, customer acquisition cost, and so on. 

It’s hard to imagine a world where analysis didn’t understand recurring, subscription based revenue for technology products.

This CNET article captures the uncertainty well: 

“Salesforce’s IPO is also seen as a test of a new business model that could shake up the software industry. The company is the poster child for subscription-based software, a model that’s gaining popularity among corporate buyers. Analysts predict that the success of Salesforce and others like it could pose a challenge to old-guard software companies, including SAP, Siebel Systems, PeopleSoft and Oracle.”

This set of metrics that Salesforce began to standardize enabled other providers of Financial Capital to more quickly analyze new SaaS companies and invest.  

As a result, you saw financial capital in the form of Venture Capital flow into software companies at record rates over the last 20 years (approaching $1 trillion dollars in total according to Statista)

2004-2010 marked the early days of SaaS where the model was still risky, and cloud providers were competing hard with their on-prem predecessors. 

Because the SaaS model wasn’t entirely proven, venture capitalists took more risk, and expected a higher return. 

Best in class VC firms over this period delivered IRR’s of greater than 40% to their Limited Partners. 

Cheaper capital was simply not available because SaaS was still in the early adopters phase of Geoffrey Moore’s chasm model. 

Things started changing in 2011.

As SaaS Metrics Become Standardized, Banks Want In On The Action

In 2011, Hootsuite raised $3m in venture debt before raising another $50m in debt from CIBC in 2018. 

Digital Ocean took $40m in debt from Fortress in 2014 after doing a Series A with Andreesen Horowitz. In 2016, Digital Ocean opened a $130m credit facility with Keybanc. 

This venture debt is a form of production capital. Debt providers take less risk, and expect less reward due to the predictive nature of a standard set of SaaS metrics.

Fast forward to 2020,  SaaS metrics are so well established that there are ETF’s that trade almost exclusively in SaaS stocks. 

The SKYY First Trust Cloud Computing ETF has grown to $3.3 billion in assets under management with large holdings in well known SaaS brands like VMWare, MongoDB, and Citrix. 

This standardization of SaaS as a business model is why we’re seeing more debt deals in business headlines today. 

Don’t VC’s Want This Dealflow? Why Let Banks In?

In 2004 the Salesforce CRM was the shiny object every dollar of financial capital chased. 

If the move to the cloud was the next big thing, and companies didn’t have to build or buy servers but could instead subscribe and pay over and over, VC’s wanted in. 

After a decade or two of financial capital saturating these new SaaS ideas, the companies started competing with each other with bigger warchests full of VC dollars. 

Billions of dollars went into chasing the next big CRM after Salesforce. Google advertising spiked for the keyword “Best CRM”. Everything got more expensive. 

This competition makes it much harder to build the next billion dollar SaaS company VC’s need to hit their 40% IRR targets. 

It’s no longer viable for financial capital to invest in the next CRM or sales automation tool.

As a result, founders with healthy SaaS businesses are hearing “no” more often. VC’s have to turn away better and better companies.

So where does a $3m revenue SaaS founder building another sales automation tool turn if they want $500k to invest in a new engineer, account executive, or marketing test? 

Venture Debt for Founders With $3m in ARR

Most VC’s have already placed their sales automation bets so they pass. 

This sort of company is a perfect fit for production capital that doesn’t need massive returns.

Churn under 10% annually? Check.

110% net revenue retention? Check.

Payback period 12 months or less? Check. 

Gross margin 85%? Check. 

Quick ratio between 2-4? Check.

Rule of 40? Check.

Sales efficiency ratio? Check. 

These metrics de-risk the business allowing founders to build wealth, while building their idea, on the back of cheap production capital in the form of debt. 

VC will continue to play a role where founders are taking incredibly large risks with outsized returns. 

 

Cheap Production Capital Will Fuel Most SaaS Founders Over Next Decade

Why haven’t more founders turned to cheaper venture debt options as they look to scale?

I think there are two reasons. 

The first comes down to education. Many SaaS founders don’t understand how debt works. 

With companies like MeMSQL raising $50m in debt last week, you’re going to see this understanding of debt permeate the overall SaaS market over time. 

The second is speed. Right now, it’s painful to work with a bank to get debt. Banks tend to be slow, require lots of paperwork, and top it off by asking you to fax in your signatures. 

Since 2016 more forms of production capital in the form of debt have become available to SaaS entrepreneurs at earlier and earlier stages of their company. 

Firms like Triple Point, Hercules, CIBC, KeyBanc and others have provided billions to SaaS founders on top of (or in replacement of) capital from “more expensive” VC firms. 

Is there a not too distant future where SaaS debt as an asset class tops $100 billion?

Someone needs to build a credit machine first. Underwriting currently takes too long and founders don’t have the time. 

 

Building a Machine for SaaS Credit Scores

Why hasn’t someone built a tool that assigns SaaS Credit Scores to companies where higher scores qualify for cheaper money? Just like consumer credit scores. 

The founder connects their bank, stripe, and other assets, gets a score, and in 30 seconds or less can accept or reject a debt offer. 

The question now is how to do debt better, faster, and cheaper specifically for SaaS companies. 

Slack just issued $750m of its own bonds at a 0.5% interest rate due in 2025. What if a $5m ARR SaaS startup could do the same? 

That’s what the future looks like. The debt machine is coming. 

It’s something I’m thinking about building. Want to work on it together? 

Email me at nathan latka at gmail.com. 

 

The post We’re About To See a Lot More SaaS Debt appeared first on SaaStr.



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