The Growing Use of Debt in Technology Companies

 

Figure 1: US Venture Debt Deal Activity (2006-2020)

 

Venture debt allows founders, management teams and existing investors to continue to invest in their businesses without the same level of dilution that comes from traditional venture equity. In addition, during Covid, we see a lot of companies shoring up their balance sheets by raising debt to extend runway and to avoid dilution from a down round. Below are some recent debt financing transactions for notable technology companies.

 

 

Figure 2: Recent Debt Deals

We expect venture debt lenders to continue to invest in the technology sector, particularly in well-known Internet companies and Software-as-a-Service (“SaaS”) companies which provide predictable revenue streams at monthly or quarterly intervals thereby creating an annuity-like cash stream which debt providers can get comfortable with. 

 

These are some of our observations from speaking to practitioners which include debt providers and advisors who focus on debt raises for technology companies.

 

Lighter Capital: At the pre-series A stage, Lighter Capital excels in providing capital to companies generating anywhere from $200K to $12M ARR and does not require equity sponsorship unlike most venture debt firms. 

Jon Prentice, Investment Director, Lighter Capital 

“Lighter Capital provides non-equity sponsored venture lending facilities to capital efficient, recurring revenue SaaS companies. Founders that we work with are generally sensitive to dilution and control and consequently use our financing model to delay or circumnavigate a venture raise until valuations are more favorable. Some entrepreneurs that we work with opt to not raise venture capital at all and will bypass earlier dilutive rounds and go straight to growth equity. The intention of our structure is to give entrepreneurs optionality so they can raise other sources of capital on their own timeline and terms.”

 

Montage Capital: Montage Capital has been a debt provider since 2005.  Montage has provided growth debt to approximately 150 companies.  Montage invests in technology companies including SaaS companies, but recurring revenue is not required.  Montage is also one of a few debt firms that has venture capital investing experience.  Montage believes this experience helps to provide strategic guidance and advice to entrepreneurs, much like what companies would obtain from venture capital investors.

Eric Gonzales, Managing Director of Montage Capital 

“Montage is intentionally small in capital under management and focuses on small growth debt financings for capital efficient companies.  Montage’s average investment amount is $2 million (range is $500 thousand to $5 million per company).  We believe that focusing on small growth debt infusions makes the most sense for the capital efficient companies we are focused on.  We focus on providing the amount of growth capital the business actually needs.”  

 

SaaS Capital: SaaS Capital provides $2 million to $10 million MRR-based credit facilities to B2B SaaS companies with $3 million in ARR and up. Companies do not need to be venture-backed, nor do they need to be profitable. 

Rob Belcher, Managing Director of SaaS Capital 

“When we launched SaaS Capital in 2007 it was unheard of to lend money to a software company, indeed, SaaS was only just becoming a ‘thing’. Now the marketplace has numerous providers offering myriad loan products, structures, prices and use cases providing companies with more financing options than ever. As the pioneer in lending to SaaS companies, SaaS Capital’s MRR-based credit facility is uniquely structured to provide companies with access to the most capital under the most flexible structure for the longest term, all to the goal of providing growth capital in lieu of equity to the benefit of the company’s shareholders. To-date we have helped our portfolio generate over $800 million of equity value.”  

 

Sanctum Capital: Sanctum Capital is an alternative investment firm that makes venture debt and equity investments in mid-to-late stage technology companies that have achieved market and customer adoption with revenues of $5 – $50 million+, defensible enterprise value and proven leadership. 

Shant Sood, Managing Partner and Co-Founder at Sanctum Capital

“Venture debt can be attractive to all parties in the ecosystem: founders and management teams enjoy less dilution; equity investors get the benefit of positive leverage and enhance ROI; venture lenders earn an attractive return with equity upside. During COVID, venture debt has been a powerful supplement to equity financing to extend runway and/or make tuck-in acquisitions.” 

 

Vistara Capital Partners: Based in Vancouver and Toronto, Vistara Capital is focused primarily on enterprise SaaS and tech-enabled services companies across North America (50/50 focus on US vs. Canada).  Investing from its third fund, typical investment size is $5M-$20M into companies doing $10M-$100M in revenue.  Profitability or venture backing is not required unlike many venture debt firms.  “Vistara” (sanskrit for “expansion”) was founded, managed, and funded by seasoned technology finance and operating executives. 

Randy Garg, Founder & Managing Partner at Vistara Capital Partners

“Having been involved in financing and working with tech companies since the early 90’s, there has always been a noticeable gap between senior bank lenders (previously non-existent in this space), and traditional sources of equity.  In filling this gap, we are looking to provide meaningful amounts of less dilutive growth capital though our form of “growth debt”.  In working with many founder owned and venture-backed companies, and partnering with both senior lenders and VC / growth equity firms, we are fortunate to be involved with many leading growth stage tech companies across North America.  With our structure and backing, we also enjoy the flexibility of being able to offer long term non-amortizing loans, convertible loans, and other creative hybrid debt / equity financing solutions to act as a true growth partner to our companies.”

 

Accel-KKR: Accel-KKR Credit Partners is part of Accel-KKR, a Silicon Valley-based technology-focused investment firm with over $9 billion in capital commitment. Accel-KKR Credit Partners provides strategic financing to software businesses that provide mission-critical services to their end customers; company revenues range in size from $10 million to several hundred million dollars. The fund provides non-dilutive investments to founder-owned businesses and flexibility to institutionally-owned businesses.  Accel-KKR Credit Partners has completed over 25 investments and deployed over $300 million in capital in the last three years. Use of proceeds include acquisitions, dividends, shareholder buy backs, and growth. Accel-KKR is headquartered in Menlo Park with additional offices in Atlanta and London.

Samantha Shows, Managing Director, Accel-KKR

“Accel-KKR has been focused on partnering with founder-owned, middle market software and technology enabled services businesses for over 20 years. The firm has evolved over time, offering different forms of capital including majority and minority equity as well as credit. With our firm’s expertise and network built from twenty years of experience in the software space, Accel-KKR Credit Partners is uniquely positioned to be more than a source of financing but a partner to help companies fuel growth and advance their journey.

Our software experience allows us to truly understand the value in technology, and specifically SaaS businesses; therefore debt facilities can be tailored around the strength and quality of recurring revenue and have various interest, amortization, and covenant structures to provide the ideal quantum and flexibility. Furthermore, our CEOs and their management teams often tap into our firm’s operational expertise and enjoy access to a powerful network of software executives where they can share insights and ideas. We receive consistent feedback from CEOs that our firm stands out thanks to our deep knowledge of the software sector.”

 

Charles Bank Capital Partners: A leading mid-market PE firm with $7.5B+ under Management is active in providing equity and debt solutions to leading technology companies. Charles Bank recently provided debt financing to Wayfair, a leading e-commerce online home store. 

Hiren Mankodi, Managing Director, Charles Bank Capital 

“The capital markets continue to be more and more supportive of technology and SaaS businesses, and the benefits of creative debt structures can be highly accretive to equity returns.  Ranging from PIPES, convertible debt instruments, PIK preferred financing, ARR based lending, and more, the spectrum of debt solutions is broad and deep.”

In the venture debt industry there also exist a number of advisors who have developed expertise in sourcing the right type of lender for each situation. The following is perspectives from an advisor: 

 

Capital Advisors Group: Ryan McCarthy, Director at Capital Advisors Group 

“There are more lenders doing deals with SaaS companies than there are in any other part of the technology sector. What’s more, these lenders offer many different flavors of debt, including term loans, MRR revolvers, revenue-based financing, mezzanine debt, and more. Since each lender has their own style, preferred structural elements, and target returns, there can be a big benefit to running a process and having conversations with several financing partners. This dramatically increases the odds of getting to a deal with the right partner and with an attractive set of terms that matches the Company’s objectives.”

Allied Advisers professionals have worked with companies which have had options of growth PE capital but decided to take Debt instead or pursued a combination of equity and debt to optimize the capital structure. Their reason for doing so was that they were able to get significant capital while limiting dilution. They could use the capital for organic and inorganic growth initiatives and went on to raise growth PE capital later at a much higher valuation. PE firms have also noticed prospects choosing debt option as it is less dilutive and can be smart capital in certain cases. As a result a number of them have raised debt funds along with equity funds. Accel-KKR, Vista Equity among others are good recent example of this. 

 

While all of this sounds great, a couple of considerations.

• In the current environment, access to broader debt market might be limited. Lots of companies are drawing down bank lines to strengthen balance sheet. Lenders are getting more cautious and borrowers need more capital in light of operational challenges

• Understand what the debt stack looks like; is there a bank who is a lender on top who will have preferential terms and who gets paid first in a downside scenario and what protections are in place

• Limit the amount of leverage used in the deal. Some debt lenders will go for multiple of EBITDA whereas some debt lenders will provide lending based on multiples of ARR or against enterprise value

• We have also seen companies which have come under stress from lenders when they miss payments or breach covenants and are forced into debt restructuring that may include sale processes when it may not be the right time to do so. Prudent financial planning can help avoid this and one should be thoughtful about how much leverage to add.

 

We know a number of debt funds which range from early stage ($200K+) to late stage (>$1B+) and feel free to reach out to any of us as you evaluate your options for capital at the next stage of your journey.