I think VCs are truly a great thing. It’s one of the things that makes the economy hum, makes some great businesses. But one thing to keep in mind when you’re an entrepreneur looking for VC funding is that VCs are swinging for the fences. They really want to get out of 10 investments they want to get like 2 homeruns and that means getting 10x their money. Six, they hope to get their money back and do okay and they expect they’re going to have a couple of dogs in there that just never run.
BJ Lackland is the CEO of Lighter Capital, an investor in early growth stage software, SaaS and tech services businesses. BJ has a broad experience leading startups making VC and Angel investments and now revenue based financing with Lighter Capital.
BJ joined me as a guest on The SaaS Revolution Show to talk about how to the options for funding SaaS Startups.
You can listen to the full podcast below, and read the transcript. Subscribe on iTunes or Stitcher and never miss an episode.
Options for Funding your SaaS Startup with BJ Lackland, CEO of Lighter Capital by The SaaS Revolution Show
BJ Lackland, CEO of Lighter Capital guests on this episode of The SaaS Revolution Show to help us understand better the funding options for SaaS Startups and the pro’s and con’s of each
Alex Theuma: Hi BJ Can you briefly introduce yourself? Tell us who Lighter Capital is? What you do? Where you’re based?
BJ Lackland: Yeah. Absolutely. So we’re based in Seattle, Washington, U.S. and Lighter Capital was really formed to provide a different way or a better way for entrepreneurs to access growth capital.
By better we mean that in two different fashions. One is that we use technology to make the funding process easier on entrepreneurs. So instead of spending weeks and months chasing after equity investors and things like that they can kind of go to the web and access capital that way. The second way we mean easier, better is to structure the investments from our side of things, the growth capital, in a way that’s better for entrepreneurs and better for investors.
We use a particular form of funding called a Revenue Loan. It’s essentially a royalty agreement between Lighter Capital and the companies that we fund. But it’s a way that’s a little bit better than equity and better than debt. We sort of say the best aspects of each one. Those are basically debt is not dilutive and so our financing is not diluted to the entrepreneur’s ownership and not controlling. As well as the fact that we align our interests with the entrepreneur much like equity does. The better the company does, the faster they grow, the better both it’s healthier for the company as well as it’s good for Lighter Capital because our Return On Investment effectively goes up in that situation.
For today’s episode, I wanted to talk about funding options for SaaS startups as I’m pretty hopeful that you’re a good guy to answer the questions on this based on what you do. Are you happy to go with that?
BJ Lackland: That sounds great. We’ve funded just about… we’ve done about 120 deals now and out of those very roughly about 57% of the companies we funded are pure SaaS and another 23% are a mixture of software and services but the software is really predominantly SaaS. So some are SaaS and some accompanying services.
So yeah, we’re targeting very much funding SaaS companies so hopefully we know a little bit about what we’re talking about.
In terms of the format, what we’ll do is have a look at some of the options for SaaS startups. I know we don’t have time to cover them all so some are excluded and apologies for that. But we’ll have a look at some of the most popular ones. We’ll go through some of the pros and I’ll ask you some of the cons as well, and maybe if we can think of examples as well on each one that would be great.
I guess before we go into the options, funding obviously is a very important thing. A very important decision for any founder to make. What do they need to do before deciding to go down a particular funding route?
BJ Lackland: Yeah. I always think the best thing to do when you start going and looking for funding is really think as much as possible about what you want the end goal to be for your business. If you’re an entrepreneur that wants to run the business forever for the next 10 years plus or something like that then you should really think carefully about whether you want to take on equity investors. Because eventually equity investors they make a return when you have a liquidity event, when you sell the business. So you don’t want to bring in partners that want you to sell if you want to maintain control and ownership, maintain running the business for a long period of time as an example.
I always counsel the first thing is sort of get clear with you and your partners or co-founders what’s really the vision of what you want to do with the business both in terms of growth and serving customers, all those sorts of good things, but also just more on the personal side. Do you want to run it forever or do you want to build it up and sell it in 3 years or whatever that goal is. Then that will really guide you towards certain types of financing choices because whenever you bring in a financing partner, whether it’s somebody like a Lighter Capital or an angel investor or VC or even a bank, it’s a mutual commitment of time and money. There are decisions that are very hard to change once you’ve committed in a particular direction. You just want to be really careful that you align sort of the investor set with what your ultimate goals are.
Alex Theuma: Let’s jump into the funding options. I want to start with self-funding or I guess we can call it bootstrapping as well.
Actually, I think I read sort of the other day, I think it was like 35% of the companies in the Inc. 500 were bootstrapped, and that was the SaaS companies were bootstrapped. That was interesting because that was, a little higher than I expected but I don’t know why. What are the pros for self-funding a SaaS startup in your opinion?
BJ Lackland: A quick point of reference, about 45% of the companies we fund are we call bootstrapped. You’re correct, there are many different definitions of bootstrap.
For us, bootstrapped includes sort of founder-funded and a little bit of family money or something like that put in. We consider that also basically bootstrapped. That’s about 45% of the companies we fund.
I think some of the biggest advantages of going that route is really maintaining control of your business so that you always have all your options open. Kind of like I alluded to you earlier, when you’re making decisions about what direction you want to go, funding it yourself or with your family or close friends leaves a lot of your options open for what you want to do in the future. That’s certainly one advantage.
The second advantage we see with a lot of bootstrap businesses is they have incredible discipline around how they spend money and around their metrics for acquiring customers. They’ve got really good metrics a lot of times for customer acquisition and cost, the lifetime value of the customer, how they optimise customer success, they reduce their churn. Things like that they tend to often have buttoned down really, really well. And some of the best-run businesses that we see are bootstrapped up to several million in revenue. That’s one of the great advantages.
And I think that one of the major ways besides maybe putting in some of their money, one of the major ways we see these bootstrapped companies survive and thrive is getting annual pre-payments from customers. Sometimes, especially in the SaaS arena, sometimes they can get longer than just even 1 year. We see 3-year prepaid sometimes as well. But getting those pre-payments can often help a SaaS business grow pretty quickly.
I’m all in favor of really looking at discounts for annual payments as kind of like a cost of capital essentially. So if your customers are going to prepay you for a year and you’re going to give them a 20% discount for that, well, you sort of have to think about, okay, well, would I be willing to take out a loan or something like that for that amount to go fund my business?
And it also kind of helps lock-in the customers. Lots of advantages to bootstrapping if you can do it.
It’s also a stressful life certainly because you often have very little room for error in things.
Having close employees, close partners, things like that that occasionally can go without a paycheck or something like that really can help a lot if you’re bootstrapping.
Alex Theuma: You alluded to one of the cons there a bit. Slightly a more stressful life. Any others that you would add to that mix?
BJ Lackland: On the cons? I think it’s mostly a stressful life. It’s also just not being able to jump at opportunities as quickly as you’d like. That’s one of the biggest reasons we see a lot of bootstrappers come to us for funding is because they’ve realised that when they’re bootstrapping there’s only so much they can go after. You’re basically going to live off what you can kill in terms of getting money from customers. It’s really hard to go hire three new salespeople because you see a cool opportunity in some new vertical or something like that where you can sell your product in. Or it’s hard to hire three new developers to go and develop a whole feature set that your biggest customer really wants.
I think that’s the biggest problem for bootstrappers is sometimes you can’t jump at those opportunities that arise very quickly, just have very little flexibility to do that. Often that’s when we’ll see, like I said, entrepreneurs either come to us for funding or I think where they go out and they find angels for funding or VCs potentially as well.
Alex Theuma: Bootstrappers perhaps are a little bit unheralded in terms of they’re not always household names? But can you think of any examples of well-known, self-funded, bootstrapped SaaS companies?
BJ Lackland: There are a couple that come into mind now. They were companies that we funded and I know them well.
One is a company that we first funded about 3 years ago but before that it was 100% bootstrapped. A company called Cloudbilt. They actually just changed their name to MapAnything. And they were, you mentioned, companies on the Inc. 500. They were #273, if I remember correctly, on the Inc. 500 last year. Besides getting about a million dollars from us, they were 100% bootstrapped.
They were 100% bootstrapped for a lot of their life. They developed some of their core products and offerings out of being a services business. They did a lot of implementations and software development and their situation is all around the Salesforce platform. That services business paid for the development of some of their early products. Entrepreneur also stuck in some of his own money a bit but really they were totally bootstrapped.
Now in that situation, I think they may be better known in part because they made the Inc. 500. Also in part they just closed their first VC round of funding, Series A, but it was after the company had been in business for a long time and they ended up getting great terms. So in some ways they’ve done a lot of different funding throughout their life but really the main thing for a long time was really bootstrapping it then we provided them some funding and then they just closed their Series A.
They’re frankly at a growth stage where a lot of companies will be closing a Series C. It’s really a first dilution for the two co-founders. That’s probably one that’s better known.
Another one that we funded much earlier on, it was totally bootstrapped again. Actually, a similar story really, was a company called SteelBrick. SteelBrick was founded by a guy named Max Rudman and Max had totally bootstrapped it, done the services, offered services and lived off that. Then he started developing this configure price quote offering also actually on Salesforce.
We were the first, first outside money to fund SteelBrick. I mean, we provided them a relatively little amount of capital. Max then went out and brought in some bigger partners. They ended up raising a ton of VC and now there are rumours that they’re going to be acquired by Salesforce for about $600 million.
Rumours that were actually published on the internet so they must be true.
Alex Theuma: Must be true. I think I’ll just answer that I think some of the household bootstrappers that I’m aware of, companies like Atlassian, Qualtrics and RingCentral. They bootstrapped to scale but then they’ve taken VC money at a late stage to add fuel to the fire.
Given the capital investment needed to scale SaaS companies to have the necessary funds to reinvest in marketing, sales, customer success programs really to fuel this acquisition engine, do we think that bootstrapping is truly viable for SaaS companies if they want to get big?
BJ Lackland: I think it all depends on what you mean by big, I suppose. But I think, like you said earlier, it’s very, very difficult to become a household name purely on bootstrapping. It’s just hard to get, like you said, it’s hard to get that marketing push and such to really get to really, really large. Really, really large meaning when you’re at that sort of scale stage where you’re going from $10 million, $20 million sales or $100 million sales it’s really difficult to do that in a bootstrapped way.
When we think about bootstrapped companies, we mostly think of bootstrapped up to several million dollars in sales which, getting from zero to several million in sales bootstrapped is an outstanding accomplishment. Truly especially in a SaaS environment where your valuations are really high and it’s difficult to do all that development and then sell it without outside capital, it’s a great accomplishment. It’s totally doable.
Like I said, about 45% of the companies we fund are bootstrapped. The average company we fund is at about $1.5 million in sales. So looking at those averages, that means we’re running into a lot of entrepreneurs roughly half the ones we back that have gotten up to about a $1.5 million in sales purely bootstrapped.
I think it’s really hard to become a true household name being purely bootstrapped. But if you can get yourself up to several million in sales bootstrapped you’ve really created an incredible amount of value. And when you bring in outside capital, number one, you’re going to have tons of choices whether it’s Lighter Capital or a bank or equity money from angels or VCs. You’re going to have a lot of different options and be able to choose your terms and your priorities at that point in time in a way that entrepreneurs start raising equity much earlier, they can’t. They have a really difficult time kind of turning off that tap of raising money a long time.
Alex Theuma: Let’s move on to crowdfunding. This is, well, it’s relatively new. But over the last few years crowdfunding has emerged as a popular method for not only funding SaaS companies but other startups as well.
But focusing on SaaS as we do, what are the pros for crowdfunding a SaaS startup in your opinion?
BJ Lackland: And by crowdfunding you mean equity crowdfunding, I assume.
Alex Theuma: Yeah. Not reward-based.
BJ Lackland: I think the advantage of doing equity like AngelList kind of stuff is that it can be relatively easy to access capital. You don’t need to go and run around doing a bunch of coffee meetings and networking and things like that to go chase down a bunch of angel investors. Now, you do have to have some outstanding metrics and you have to figure out a way to make yourself stand out versus everybody else that’s posted on the AngelList or one of the other sites doing crowdfunding, but it can be a relatively easy way to access capital in that regard. You can kind of sit at home, put up information on the web and hopefully people are willing to close and fund you based on the information you put up there. I think that’s really the biggest advantage.
Alex Theuma: And cons of crowdfunding? Have you come across any?
BJ Lackland: The cons are, it sounds kind of strange but almost the inverse of the pros. You don’t know your investors as much so you now have given ownership to somebody that you don’t know as well. You don’t get to vet them as much as you would if you actually went around and sort of raised money the old fashioned way a little bit.
Also, a lot of times in crowdfunding, you end up with a lot of different people on your cab table and sometimes that can be difficult. I think it’s really good and it would be healthy to have some diversity of investors. You can always go back to those people and hopefully get more money from them.
However, there’s sort of an optimal level of number of investors. If you get too many, you’re going to end up spending a lot of your life doing investor relations. And because you know these people have given you money and whether it’s $5,000 or $10,000 or $100,000, they believe they’re owed their time to get their audience basically and it’s hard to say no to that. It’s true. They’ve given you money. You need to return their phone calls basically. If you’ve got 50 of those, it could be a time-consuming affair.
That’s really, I think, the biggest downside.
Alex Theuma: I’ve heard it can take an awful long time. You have one month for the campaign itself but up to 6 months preparation if you’re really planning for a successful campaign, that is.
Therefore, given that length of time, do we think that this is a viable option for SaaS startups?
BJ Lackland: I think it can be. I think you need to be careful because once you start going down that route you need to be pretty committed to it. Like you said, you want to plan out your campaign. You really need to look at this basically a marketing campaign which in some ways the old-fashioned style of raising money running around and doing coffee meetings and networking is kind of a big sales campaign where you’ve got a pipeline full of potential investors you’re selling equity to.
In some ways, crowdfunding is a little more like a big marketing campaign. You’ve got to go figure out your big selling points. You got to go and market it to the right people. And you’ve got to be able to sort of draw them in. It’s a little different process but once you’re sort of committed to a direction with it, you really need, have to kind of follow it through the end because it’s hard to dabble at a lot of those different kinds of things and succeed. You’re more likely to succeed if you commit to one direction or the other.
Alex Theuma: Okay. For the sake of time, I’m going to cut Angel Investors out. Apologies, Angel Investors. We’re moving straight to Venture Capital (VC).
What are the pros of taking VC money in your opinion?
BJ Lackland: The biggest pros of taking VC money is that you can get a large amount of money from one investor. You’ve got one and a professional investor. You’ve got one investor or two investors or three investors, a limited set of investors that have deep, deep pockets that can cut 7-figure checks probably and/or larger, and they can grow up with you. They can be a funding partner that continues with you and to provide that large amount of capital.
Getting back to like the conversation we were having about becoming a household name and things like that, it’s hard to do that without those bigger slugs of capital coming in. A VC investor, really, their biggest thing is really providing those large amounts of capital.
Now, secondarily, a lot of the better VCs really can help add value. They can help connect you up to new sales channels. They can keep their eyes and ears open about what’s going on in the market. They might help you be able to position the company for sale. Some things like that. It may help you access talent. It can certainly be easier to access talent when you raise a round of financing as opposed to when you’re bootstrapping and everybody kind of knows you’re thin, for example. That can certainly help. It’s really helpful to sort of have that jet fuel behind you at certain points.
Alex Theuma: And the cons of taking VC money?
BJ Lackland: The cons are, to sort of continue the analogy, I suppose, is that you’ve now sort of strapped that jet fuel in a rocket to your back because now you’re really committed to a bunch of professional investors that not only do they own a bunch of your company but they also most likely are going to sit on your board and effectively become your partner in the business and slightly your boss. You’ve kind of strapped a rocket pack to your back and either you’re going to shoot to the moon or you’re going to blow up halfway.
In some ways, a lot of times when we have a lot of the companies that we fund and they’re thinking about going raising VC money, I often counsel them like, listen, make sure you know what you’re going to do because if you’re going to raise VC money, it’s very difficult to then only grow at 60%, 70%, 80%. You really have to shoot for triple-digit growth ideally like 200% or so and keep that up for a long period of time. If you don’t, you’re somewhat at risk of losing control of your business. You’re truly bringing in a partner to the business and that has great advantages, it also has some risks to it.
In general, if you look at VC funding, VCs by the very nature of some of the metrics of what makes up a VC fund and what makes a successful VC fund, VCs swing for the fences.
Back when I was a VC earlier in my life about 5 years, I think VCs are truly a great thing. It’s one of the things that makes the economy hum, makes some great businesses. But one thing to keep in mind when you’re an entrepreneur looking for VC funding is that VCs are swinging for the fences. They really want to get out of 10 investments they want to get like 2 homeruns and that means getting 10x their money. Six, they hope to get their money back and do okay and they expect they’re going to have a couple of dogs in there that just never run.
Alex Theuma: You mentioned getting their money back 10x. I’ve read a lot of stuff where you see this sort of positioning of if you take VC money it’s because you aim to be a billion dollar business or they expect you to be a billion dollar business or unicorn. That’s what you need to be to take VC money. But do you think that’s still true these days?
BJ Lackland: Yeah. I don’t think you have to. There’s so much attention to this unicorn thing and such. I don’t think you have to be a unicorn. Believe me, VCs can make very, very good money and you can be a very, very big winner in their portfolio and not be a unicorn.
Depending on how much money you take, if you take sort of an A-Round and a B-Round, maybe a C-Round, meaning you’re going to take somewhere in the realm of $5 to maybe $30 million or something like that, maybe more. You just have to be cognizant of the fact that the more money you take, the higher the sale price of the business needs to be to get the investors their return.
If you just do, say, an A-Round for a couple of million dollars and then you build up the business and you sell it for $100 million, almost guarantee those VCs are incredibly happy that you’ve made them an incredible Rate of Return. But if you raise $20 or $30 million and you sell the business for $100 million, my guess is you may have some early investors that are happy but some of your later investors probably didn’t make their target return on that.
Every time you raise more and more capital from VCs, your threshold from where an acceptable exit will be will go higher and higher and higher.
Alex Theuma: Now, we move on to the last one. I think this is one that you know a lot about. Revenue-based financing. You touched on it at the beginning but let’s sort of remind everyone and even myself.
What is revenue-based financing? What stage would a SaaS company apply for it?
BJ Lackland: So revenue-based financing, what we do here at Lighter Capital, it’s essentially a royalty agreement. We fund companies as early as having about $15,000 a month in revenue up to sort of unlimited size. Typically when they get up to about a million dollars a month in revenue they tend to go for other kinds of funding options and things like that. So we really specialise in about $15,000 a month in MRR up to about a million or so.
What we do is, like I said, it’s a royalty. So we provide the company a sum of money and we’ll do anywhere from as low as $50,000 up to about $2 million. We give them a sum of money, say for ease in math, worth $100,000 that’s what we gave them. Then they pay us monthly a percentage of their revenue, like I said it’s a royalty agreement, until they’ve paid us a total amount of money. That total amount of money, if we gave them $100,000, that total amount of money might be $150,000 or $200,000 but it’s a set amount and we get us paid as set percentage of revenue.
The idea is if the company grows really, really quickly then we’ll get our money back faster and our ROI goes up. If the company grows much more slowly than we expect then we get paid more slowly and our ROI goes down.
It’s set up as a loan but it’s really an incredibly flexible instrument. It’s really meant to sort of bridge that gap and fill that hole between equity investors that are looking for 10x on their money and banks and other lenders that are looking for 6% interest rate or 8% interest rate and they just want to make sure they get paid. They don’t really care what happens to the company so long as they get paid.
We care a lot about what happens with the companies we fund because if we can help them grow more quickly then our returns go up. If they grow more slowly then our returns go down and that’s kind of the risk we’re taking.
Alex Theuma: What are a couple of the key pros of revenue-based funding?
BJ Lackland: The main key pro really, two of them essentially. One is it’s not dilutive, so we don’t get any equity ownership in the business. Aligned with that, the second sort of key pro really is that the entrepreneur stays in control. So we don’t take a board seat, we don’t vote shares, anything like that. We sort of once we’ve funded the company, we get paid our percentage of revenue. We’re along for the ride.
I guess the sort of third thing about it is it’s very flexible. The whole idea is when a company gets a lot of revenue then they make a bigger payment to us. When they don’t get a lot of revenue then they don’t make a big payment to us. So the idea is they’re never strapped for cash to make that loan payment to us.
Alex Theuma: And what are the cons? All the other options had some cons so you got to give me one or two.
BJ Lackland: The con really is that, as opposed to equity, you have to make payments. So we’re providing a sum of capital to a company say on Month 1 and then over the next 60 months they have to pay back that capital. With equity, obviously you don’t have to pay it until you have a liquidity event, so the very end.
The advantage of Lighter Capital is it’s not dilutive and not controlling and such. The disadvantage is, because of that, you do have to pay it back month by month. Although it’s flexible, you’re still making payments. So we give you money but then we also are getting paid back over time. That’s really the biggest disadvantage.
Alex Theuma: Okay. Well, I think that’s been fantastic. We’ve gone through all those options. We’ve talked about some of the pros, some of the cons. I think and I hope it makes for a fascinating and informative listening for the SaaS founders that are listening out there.
So on that note, BJ, I want to say thanks so much for joining the show today.
BJ Lackland: Thank you. It’s been a pleasure.
Listen, I love SaaScribe. It’s great. We look at it a lot and send it out to a lot of the companies that we fund. We send a lot of articles out to them because it’s just great to have a place where you to get great advice specifically for SaaS businesses.