Over the past month, revenue-based financiers such as GetVantage and Velocity have set aside a dedicated corpus of Rs 250 crore and Rs 300 crore, respectively, to meet the growing demand for this kind of debt financing in the software-as-a-service (SaaS) industry.
Revenue-based financing is non-dilutive and non-collateral-based lending where a company raises funds from the financing entity in exchange for a percentage of its gross revenue.
This comes at a time when revenue multiples for valuations have been adjusted and the bar for early-stage investments have risen, leading to a challenging and expensive equity market.
However, 50-70% of the demand for these financiers is coming from bootstrapped software startups that have found product-market fit and are looking for capital to scale their go-to-market (GTM) functions. This includes funding increasing infrastructure cloud costs, digital marketing and other functions.
For revenue-based financiers–which in the past were heavily focused on segments such as ecommerce and direct-to-consumer brands–the predictability and recurring nature of revenues of SaaS businesses, along with the growth are key factors to sharpen focus on this sector.
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“For far too long, equity investors have been taking debt-like risk with equity upsides. Equity should be for funding high-risk moves,” said Abhiroop Medhekar, cofounder and chief executive, Velocity, which is backed by Peter Thiel’s Valar Ventures. “Debt investors, on the other hand, don’t want a high upside but predictable returns. As corrections in public markets compress multiples in private markets, SaaS founders are finding less expensive ways of supporting operations.”
With the Rs 300-crore corpus, Velocity is looking to lend to some 100 companies, putting cheques between Rs 50 lakh and Rs 5 crore for a tenure of 12-18 months, depending on the monthly revenue run rate of the company.
It currently lends through partner non-banking finance companies (NBFCs) such as U GRO Capital, CredAble, Oxyzo and BharatPe-owned Trillionloans.
“We can increase this corpus by another Rs 200 crore in the coming months, looking at the demand,” Medhekar said. “Indian SaaS has hit a critical mass and has more predictability than other industries.”
For GetVantage, its Rs 250 crore SaaS Accelerator Fund II is its second major corpus deployment in the sector within a year. It had launched its first dedicated corpus for SaaS founders in April last year worth Rs 65-70 crore, during the collapse of Silicon Valley Bank in the US, which caused a wide scale panic amidst the Indian startup fraternity.
“There is more dry powder coming towards revenue-based financiers, with family offices looking to participate in such alternative investment instruments,” said Bhavik Vasa, founder and chief executive of GetVantage. “In the current correction cycle, there is also more founder awareness towards alternative forms of financing. Founders have also realised that it is far cheaper to look at debt to push their core engines than raise equity.”
GetVantage, which will provide 75% of the corpus through its own vehicle, including an NBFC, GetGrowth Capital, is looking to invest across 150 deals with its latest SaaS Accelerator Fund. It backed 65 businesses with its previous corpus for the segment.
“Interestingly, we saw a higher pickup (for cash-flow lending) in SaaS and 20% of our portfolio now comprises SaaS startups,” said Vasa.
Vasa said SaaS businesses starting to see subscription growth in India is another key factor leading to predictability and comfort of revenue-based financiers to lend to these companies.
“If you are profitable, you don’t want to dilute more equity, especially at a low valuation. So by subscribing to alternative financing, it gives you an added advantage and revenue boost,” said Anil Agarwal, chief executive and cofounder, InCruiter, a HR-tech startup.
InCruiter had raised $1 million in revenue-based financing earlier this month.
However, investors are wary of software startups piling up debt on their balance sheets, especially at a time when buyers are curtailing their software spends
“Good SaaS companies should have high net dollar retention (NDR), even in this market, and therefore can grow with minimal GTM spend. Instead of raising debt, they need to be judicious about their investments and opt for moderate growth,” said Alok Goyal, partner, Stellaris Venture Partners. “Enterprise software buyers are still not opening up their purses easily, and in this environment, raising debt and increasing sales and marketing expenses is not wise in our opinion.”