If you find yourself looking for more funding after using your PPP money, you are not alone. Since the start of the year, a lot of things have turned upside down, both in our businesses and personal lives.
Founder and management teams have been looking at their businesses in a whole new way as they come to grips with what has been going on in the world. The same is true for venture capitalists and debt providers.
The provision of finance through the SBA Payroll Protection Program (PPP) and Economic Injury Disaster Loan Program (EIDL) has been a lifeline for a lot of companies. They should make sure they are able to take advantage of PPP forgiveness. Follow the guidelines set out by the SBA, use the calculators, and talk with your SBA advisor.
So what does the future of funding look like for SaaS companies as PPP loans get spent and we continue to deal with the pandemic?
Investment rounds for growing SaaS businesses will continue to get done, albeit with different parameters than the past.
Availability of Venture Capital:
In recent months there has been a divergence in the type of funding available. Equity funding through VC is down 44% year over year, while the debt market has largely remained open (depending on your company).
While the amount of funding per equity round has increased for some industries, venture capital has seen smaller rounds on average. The pandemic hit the travel industry particularly hard. Meanwhile, remote work and telecommunications companies are booming.
Valuations have also been hit. Unless you are in a sweet spot that’s thriving in this environment, the equity you raise now will be more costly than pre-COVID.
Deals are also taking longer. Only 55% of venture capitalists are confident in doing virtual deals. With 24% saying they’re ‘not at all confident.’ The numbers just get worse when you look at family offices or corporate venture capital.
Availability of Debt:
Unusually, we’ve seen unicorns like Uber, Airbnb, and countless small companies raise debt over the past six months. This was mainly to bolster cash on hand and protect the businesses, while equity valuations were not attractive.
In general, the demand for debt financing slowed down among small businesses, as companies used PPP to fund their operations in the short term. As the need for private finance returns, we are seeing an influx of interest in debt financing. It would be best to plan ahead for this and start conversations with finance providers sooner rather than later.
Pre-COVID, the market for providing debt had been on the rise, as founders looked for more efficient ways to use capital and hold on to control of their companies. Over the next few years, we’re likely to see debt providers to SaaS continue to develop quicker, more flexible, and lower cost funding options for companies. This should bode well for founders.
How Debt Providers Are Lending During COVID:
Both VC and debt providers are now looking at the following things a little differently these days. Here are some adjustments to their perspective you should note:
- Target Market – As expected, lenders have shown preference to industries not affected by the economic downturn, or ones that will bounce back quickly.
- Some businesses took off due to the effect of the pandemic (health tech, remote working tech, ZOOM, etc.)
- Some businesses were badly affected through no fault of their own (hospitality, event tech)
- Customer base – Strength and diversity of your customer base has always been high up on the list for a funder. This is even more true now as we all look at risk a little differently at the moment.
- Cost Structure – Have you been able to adjust your cost structure? Flexing costs is a strength that benefits all types and sizes of companies and is particularly desirable right now.
- Cash Runway – How long will any new financing last you? How long is your cash runway? Lenders want to know how debt can get you to break-even/profitability or allow you to grow your revenue substantially.
- Management team – Debt providers know it’s important to have a strong management team. You need people that can think on their feet. People who can pivot the business to deal with the new norms of things like remote work or changing a product to be more useful during the pandemic.
- Growth – The last few months have been very different, and providers know that. They understand the impact on new business. How you dealt with this will help give them comfort about the future of the business.
If you have solid revenues, you should consider debt financing, which is faster to fund and conserves your equity.
Planning for 2021:
This pandemic isn’t going anywhere fast. We all need to have plans for 2021 which allow us to continue developing our businesses. Taking on an appropriate amount of debt for your business may be a good source of growth capital over the next 12 – 18 months.