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Founder Toolkit 🧰 - Non-Dilutive Funding
25 Tools, $100bn+ in Capital
This is is the 3rd part of the Founder Toolkit series, after the Investor Databases and Cold Outreach Playbook posts. Thank you to everyone who has provided me feedback on this post and previous posts. Feel free to reach out to me on Twitter to connect.
I want to kick this off highlighting a few important caveats.
Firstly I’m not an accountant, nor a financial advisor. I’m simply a Founder looking to put together tools that may be useful to other Founders. The list below is not exhaustive and nothing I say should be considered as financial advice.
When looking at any of the tools or products below, please ensure you consult with your accountant / CFO / FD for their opinion, the products may not be right for your business at this point in time. Many of the products below include debt, which can be dangerous and in certain instances could result in you losing your business, tread carefully.
Secondly, the best way to fund your business it not necessarily with either equity or the non-dilutive funding resources below, it’s by building an awesome business with strong revenue and a commercial model which allows you to grow organically. How Microacquire started is a good example of this.
If you’re time starved, here’s a hack to utilise the toolkit more quickly: skip to the 🔧 emojis for links to the tools.
In my first post of the Founder Toolkit, I researched and put together a list of 22 investor databases for startups with more ~400,000 investors🔧. The response was amazing, and I’ve since been overwhelmed with positive feedback from founders who have been funded as a direct result of that post.
However equity funding is not the right model for every company. Even for those that it is right for, there are times in the journey where you’d be better off not doing an equity fundraise and preserving ownership for you and your existing shareholders.
This is where non-dilutive funding (NDF) comes in.
NDF is a powerful weapon in the growth arsenals of both bootstrapped and venture-backed companies if used intelligently.
Velocity Black, the company I founded, has raised more than $30m in equity financing over the years. We have also raised close to $10m in NDF during that time. At some points on our journey it would have been less optimal to raise money through issuing shares. We opted for alternative, NDF sources (a mixture of revenue financing and R&D tax incentives). The result is a business where the existing shareholders (including us as the Founders) own more of the pie. So if you already have angel / VC backing, non-dilutive financing can be a smart way to increase your runway between rounds or fund a marketing campaign without having to issue shares.
If you are a bootstrapped company and do not plan on growing at >3x per year, you probably should not raise venture capital, but NDF is a great way to tap into more capital and grow.
The advantages of NDF:
Maintain ownership (no dilution - clue is in the name!)
Quick funding decisions (some as little as a few hours)
Cheap (or in some cases free) - particularly in today’s low-interest environment and compared to the future value of your equity
Freedom - when it comes to important decisions on future funding strategy or exits, you retain control and the freedom to pursue the best path for you
I’m going to explain the many different types of NDF with links to the best-in-class providers and advisors for each.
I’m starting with grants, as while the absolute $ amounts are small, they are an absolute no-brainer, as most do not need to be repaid and are almost free to claim.
There are many government schemes around the world to support R&D and innovative businesses. In the UK the government spend more than £5bn per year supporting young, innovative businesses through R&D tax credits. In the US the annual support for R&D from the government is more than $100bn.
This money is effectively free (except the small fees you pay the advisors who help you secure it). It is not a loan, you do not have to pay it back. It is not secured on anything. You do not have to give up any shares. It’s simply awarded to innovative companies to help them grow and invest further in innovation.
Tax Credits (US) - In the US there is a complex, but very well government-funded tax credit system for innovative businesses and small businesses. Every year the US government invests more than any VC fund in startups through grants and tax credits. In order to navigate the space you need expert advisors. While your existing accounting firm may be able to help with some claims, they are not specialised in these claims, and therefore will likely not secure you all grants available.
The best company in terms of expertise and cost for assisting you in this process is Main Street🔧 by Doug Ludlow. Their tagline ‘Get $50k back from the IRS in 20 minutes’. It’s risk free as if you don’t get any money, they don’t get paid. They have successfully claimed more than $100m in tax credits for startups including Haus, Deel and Levels.
R&D Tax Credits (UK) - in the UK there are two types of R&D tax credit:
SME R&D Relief, and you qualify to apply if you have less than 500 employees, turnover <£100m or balance sheet <£86m. SME Tax Credits allow companies to:
deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss
This means you receive cash in your bank account from HMRC equivalent to a very significant % of your spending on R&D if your engineering products qualify. More on the requirements here🔧.
Research and Development Expenditure Credit - for large companies that don’t meet the application criteria above or for companies that sub-contract from them. You can now claim back 13% of your qualifying R&D expenditure under this scheme. More information here🔧.
The process for claiming these credits is complex and requires expert advice. There are many companies and accountants who can help with your claim, but I’d personally recommend EmergeOne🔧 run by Aarish Shah who can help manage the process.
R&D Tax Credit Loans (UK) - In the UK if you are eligible to claim R&D tax credits, then you could also be eligible to take out a loan against a future R&D tax claim. This means if your company is eligible for say a £250k R&D tax claim at the end of your next financial year, you could borrow up to 85% of that amount today from a lender. There are many lenders in this space, but I’d personally recommend FundSquire 🔧 by Damien Petty.
R&D Tax Credits (Rest of World) - If you’re not in the US or UK, do not worry, I’ve got you covered. Here’s a report by KPMG🔧 showing Tax Credit incentives for all 50 countries that currently support them.
📈 Revenue-Based Financing
Revenue-based financing (RBF) is set to grow at a staggering CAGR of 62% between 2020 and 2027, from $901 million to $42 billion.
What’s driving this?
If you ask a corporate finance expert, here’s what they’ll say ‘It’s a combination of low interest rates, growth in online businesses and ability to instantly verify revenue through API integrations with payment processors.’
If you ask me (customer of these services): it’s the quickest and easiest source of capital (if you have revenue and are growing).
Speed matters when you’re running a fast growing business. The opportunity cost of a 1-2 month fundraise as a Founder is likely >100% of your yearly revenue. I took out our first revenue financing contract in early 2019 and it took hours to get funded, not months.
How does it work?
You typically provide access to your payment processor (Stripe, Shopify or other) and/or client contracts (B2B) and accounting systems via an API. The revenue-financing company then calculates an amount they are willing to lend you based on previous revenues, seasonality, growth rate, margins and a number of other ‘black-box’ indicators they will not share publicly. Once you provide access, you typically get an offer in hours / days.
The offer you receive will typically include the $ amount you’re being lent up front, the % of revenues that will be used to repay it (eg 10% of future revenues) and the ‘fee’.
The fee is normally fixed. It is important you calculate the fee on an annual basis in order to be able to compare the offer versus other NDF (cost of capital).
For example if you received the following offer:
$500k revenue financing facility
10% repayment rate
$60k fixed fee
This would mean you would need to pay back a total of $560k which would be taken as 10% of your future revenue. If you predict based on your current model that you would pay off the loan within 6 months, that would mean your cost of capital is equivalent to ca. 24% APR (that of a high interest credit card).
If you agree to the contract, the platform then automatically debits from your bank account the agreed % of revenue 1-2 days after you receive it from your payment processor.
Some providers also provide perks and better rates based on you spending the facilities with certain providers.
Is it right for you?
You should take advice from you CFO / FD / Accountant as it very much depends on the offer(s) you receive. In general though my advice is to only take this form of financing if:
Your gross margin is >50%
Your business is growing and forecast that growth will continue
You will use the proceeds to invest in growth (rather than paying off a debt)
The benefits of RBF are:
If your revenue declines, your repayments reduce (unlike a traditional bank loan)
If your revenue declines, the fee for the loan remains fixed, unlike a traditional bank loan where you would continue paying interest for the duration it remained unpaid
Typically they are only secured on your receivables and do not require any personal guarantees
The RBF Funding Platforms
The good news for founders is that the explosive growth in this new financing model means fierce competition for your custom. There are new companies sprouting in this space every week. I haven’t listed all of the RBF companies below, but I’ve listed those with the best reputations including several that I have worked with at Velocity Black.
Clearco 🔧 (US, UK, EU and Australia) by Michele Romanow and Andrew D’Souza and backed by Softbank. The OG revenue financing platform, Clearco have now invested $2b+ in 5.5k businesses and claim to be the world’s largest e-commerce investor. I have worked with them before and would recommend this as your first port of call. They have three different produces (ClearAngel, ClearCapital and ClearRunway) depending on type and stage of business.
Pipe 🔧 (US & UK and global companies with a subsidiary in either US or UK) by Harry Hurst, Josh Mangel & Zain Allarakhia (backed by rockstar investors including Chamath Palihapitiya and David Sacks.) Pipe converts recurring monthly revenue into upfront capital (imagine turning all the monthly payments from your customers for the next year into 1 up front payment now).
Uncapped🔧 (UK) by Asher Ismail and Piotr Pisarz. With $120m in capital to deploy, Uncapped are one of the largest UK-focussed RBG providers. They’re typically one of the most competitive in terms of pricing and have funded some of the best companies in the UK including unicorn Marshmallow.
Outfund 🔧 (UK) by Daniel Lipinski - a similar size and focus to Uncapped. In my experience the best customer service and responsiveness of any provider.
Wayflyer 🔧 (US, UK, Australia) by Aidan Corbett & Jack Pierse - Wayflyer focus on e-commerce and have funded more than 600 companies with $300m.
Founderpath 🔧 (US) by Nathan Latka - focussed on bootstrapped SaaS Founders, loan up to $1m within 72 hours.
Capchase 🔧 (US and soon Europe) by Miguel Fernandez Larrea - relatively new to the game as a pandemic baby, but have made $400m available to founders already. What’s interesting about Capchase is they have two products: standard RBF and also an expense financing product. Expense financing means you can spread out payments for a large invoice over time.
Credibly 🔧 (US) by Ryan Rosett and Edan King - one of the older players in this nascent space as they started in 2010. Aside from RBF they offer a number of other financing options for smaller businesses which are worth exploring.
If you’re looking through the options above and thinking it’s a little confusing and hard to compare the offers like-for-like, there’s a platform set to launch soon which will help guide you through the process: FundStory 🔧 by Bobby Gilbert. Their mission is to help match Founders with the right non-dilutive capital source for their business. You can currently sign up for their Beta.
FundStory have a full suite of tools to help you:
plan the funding process (with guidance on what KPIs you need to hit if you’re not immediately eligible)
compare offers from different RBF providers
forecasting & cash management
Final point on RBF: while some VCs do not like the model (as it’s eating into their allocations and incentives) it’s great to see some embracing it, like Overlooked Ventures.
🏦 Term Loans & Credit Facilities
Term loans are a more traditional form of lending, and are offered by all major business banks. However historically they have been reluctant to lend to early-stage businesses, which are typically are loss-making and / or have a short track record of generating revenue.
However there are some lenders who take a more innovative approach and they have been growing rapidly in recent years.
Things to watch out for when signing a term loan / credit facility:
Interest rate - if you’re comparing a term loan with RBF you should compare the interest rate with the cost of capital on an annual basis of the RBF facility
Covenants (most of the below are ‘covenant-lite’) eg needing to meet certain growth or profitability thresholds
Security / guarantees - do they take security over any business assets? do they require personal guarantees (big no from me)
Warrants - I don’t think any of the below ask for warrants - try to avoid this if possible as it could lead to some dilution of your shareholding down the line
Repayment schedule (monthly? quarterly? bullet repayment at end of term?)
Origination fees / DD fees
The top lenders to fast-growing / innovative businesses:
Timia Capital 🔧 - focussed on recurring revenue tech companies. Provide term loans $2-20m. They have two core products:
Interest Only - 2-3 year term loan - interest only
Amortised - 3-6 year term loan, risk adjusted rates 12-20%, interest only period transitioning to increasing principal repayments
Element Finance🔧 - provide up to $10m to companies for terms up to 5 years with interest-only repayment periods available.
Lighter Capital🔧 - term loans up to $3m.
Bigfoot Capital🔧 - focussed on growing B2B SaaS companies with $1.5m+ in ARR, Bigfoot offer terms loans, RBF and a hybrid of the two models.
SaaS Capital 🔧 - lend $2-20m to B2B SaaS companies with >$250k in monthly recurring software revenue in the US, Canada and UK. Long term loans (5+ years).
Funding Circle 🔧 - UK focussed loan provider for small businesses with loans from £10-500k
💳 Credit Cards
While providing typically a small amount of credit, credit cards are typically a flexible and quick way to get access to finance for small businesses. You’d be surprised at how any of the largest companies in the world were initially bootstrapped and funded off company credit cards.
Make sure you check the terms and conditions, avoid personal guarantees and forecast carefully to ensure they can be paid off.
I’m not going to share with you a list of all the different credit card providers, here’s some of the more interesting companies though with credit cards focused on small businesses / startups (all in the US):
Brex🔧 by Shai Goldman - is one of the more innovative challenger business banks & credit card companies in the market. If apple were to make a business bank, I think it would look a lot like this. They seem to be winning the game as well vs others in the market…
Ramp🔧 by Eric Glyman and Karim Atiyeh - a business credit card and expense management platform focussed on saving companies money. Attractive cash-back rewards and significant savings with hundreds of startup-centric partners.
Silicon Valley Bank 🔧 - offer two credit card products focussed on Founders and startup teams with attractive rewards.
I have not included Venture Debt in this post, as it is dilutive in almost every instance. However Venture Debt can be used to reduce dilution if the alternative is raising equity. If you’d like to read up on it, I’d recommend this post 🔧 by Tom Mohr to get you started.
Thank you for reading. I’m open to any feedback or suggestions, the best way to reach me is by Twitter DM. If you enjoyed the post, subscribe below to hear more from me in the future.