Recently I’ve written about why banks don’t understand SaaS companies, so it probably makes sense to talk about why we think app and SaaS companies make great investments, and what we at Lighter Capital look for.
We focus on a particularly under-served part of the market: early-stage app, SaaS, and technology companies that have started to generate revenue. From our perspective, many of these companies offer a great investment opportunity. Frequently, all they need to kick their revenues to the next level is a $250,000 to $1,000,000 investment in sales, marketing, or product development. In many cases companies don’t require all the capital right away and prefer to optimize their cost of capital by ingesting new capital as they need it. Why pay for capital you don’t need?
So what do we look for when funding an app Company? Well there are some baseline requirements—at least $15,000 per month of consistent revenue. We like to see low customer churn, subscription-based revenue streams, and long customer engagements. Customer diversity is also important; we don’t want you dependent on one customer for survival.
We also look for gross margins of 50% or higher, which is usually no trouble for app companies. You don’t have to be profitable as long as there is a visible path to profitability and cash burn is reasonable. If you need more capital than we can provide you just to keep the lights on, that’s a deal breaker. We like to see our financing used for growth initiatives—sales personnel, marketing initiatives, or product development, for example.
We like to get to know companies before we invest, and we work closely with companies to help them grow and be successful. Historically we fund about 18% of the companies that apply for funding and meet the criteria above, which is dramatically higher than venture capital.
We are called Lighter Capital for one reason—we believe in making the capital raising process “lighter” on the entrepreneur. It’s hard enough to run a business without having to spend countless hours looking for funding. So here is what we don’t need:
A 1,000 page business plan. It’s a horrible waste of time.
A personal guarantee. Unlike banks, we’re making a bet on the business and you as a leader of it, not on the value of your personal assets.
Audited financial statements. At some point this is a good idea, but we don’t need them. Most companies we fund have a bookkeeper prepare financial statements.
A gazillion dollar market opportunity. Great if you have one, but most of all we want you to have a real, solid business and opportunity to grow it.
Finally, there has to be a solid understanding of the alignment of our interests with the entrepreneur’s. The beauty of revenue-based financing is that the payments ebb and flow with your customer’s cash payments. This means the loan shouldn’t force you into a cash crunch. The ebb and flow of these payments also means Lighter Capital’s interests are directly aligned with the entrepreneur’s, because, like a VC, our investment success depends entirely on the success and growth of your business—the faster your company grows, the sooner we get our ROI. So we’re on your side and available to help when you need it.
But unlike a VC, we don’t control you; we don’t take a board seat, don’t vote shares, and can’t force you to sell your business. You stay in control. We are a partner in growth, but we don’t need you to sell your business for us to see an ROI. In fact, we’re sort of the “leave no trace” investor. We like to think that the alignment of interests we have with our portfolio companies creates a win-win situation where we can be more than just a funding provider.
We know, unlike the banks, that app and SaaS companies are great businesses and, unlike VC’s, we also know that it’s not all about the one investment that goes into the stratosphere. We think—why wouldn’t you invest in these kinds of companies? Strong growth, great margins, little overhead and ever expanding market opportunities. To us it’s a no brainer that SaaS and app companies can make great investments.
Gearing up to fundraise?
This guide explains explains the most important components of a successful fundraising strategy and how to prepare.