As we work with tech business owners day in and day out, we know this isn't the reality for most tech businesses.
Business owners come from all walks of life. While venture capital is a popular financing strategy, many start their businesses based on their hard work and the money they can put into it personally or get from friends and family.
Unlike venture-backed companies, self-funded tech companies tend to be profitable much earlier and can grow by generating their own funds.
Even so, these companies often have difficulty obtaining debt financing. Like most technology companies, they have very few tangible assets to offer as collateral for a loan, and conventional lending institutions often view them as too risky to finance.
Even in a changing environment where financial institutions are increasingly willing to lend to technology companies that have raised venture capital, self-funded companies can often struggle to secure additional funding to grow.
Self-funded tech companies are often more efficient
A significant advantage of self-financing is that you control your business and its strategic direction. You also have the opportunity to benefit from the return on earnings or profits from the sale of the business.
However, this greater independence and the advantage of ownership also comes with challenges. Business owners who rely on self-financing often try to do everything on their own. Overworking and doing tasks they don't enjoy can lead to burnout.
Our experience has shown us that well-managed, self-funded companies with a strong management team are able to compete with venture capital-backed companies in any sector.
We see self-funded companies that do not have a formal consulting structure providing feedback on their business strategy as well as technical guidance.
Regardless, our experience has shown us that well-managed, self-funded companies with a strong management team can compete with venture capital-backed companies in any industry.
Much of this success is due to the fact that entrepreneurs who self-finance their businesses are accustomed to prioritizing customer needs, business productivity, and lean management. They tend to keep more of their money and focus more on delivering products or services.
Self-funded companies often exhibit a very high level of efficiency in the allocation of capital; they return more money to investors for every dollar invested in the company.
How we evaluate technology companies
Unfortunately, many lending institutions decide whether or not to lend to a technology company based on the quality of its venture capitalists.
As we have been working with technology companies for years, we prefer to assess the quality of the management team, product and market trends as well as current and future cash flows. This way, we are able to support growing self-funded technology companies much faster.
Having worked with technology companies for years, we prefer to assess the quality of the management team, product and market trends, and current and future cash flows.
This allows the owners to maintain control of the business and reinvest profits into its growth until such time as they can raise equity capital or prepare to exit, or simply continue to run the business in their own way.
Our goal is to help the management team grow the business and build credibility by setting up an advisory board or bringing in a part-time CFO, for example. We also try to help put in place a stronger lawyer database governance and reporting structure, which often increases the valuation and makes the business more attractive for investment or sale.
Supporting self-funded software-as-a-service companies
Many of the companies we fund are software-as-a-service (SaaS) companies . These companies are often looking to hire more people or invest in research and development or sales and marketing.
Early-stage companies often seek small amounts of financing. A typical company might need around $ 2 million . At this scale, the legal fees associated with equity financing make the deal much less attractive. On the other hand, tailored financing with a customized repayment schedule can be disbursed quickly and invested in growth.
Although most early-stage SaaS companies are not profitable, many are still able to access financing. This is often done through a monthly recurring revenue (MRR) business loan or a quasi-equity loan .
An RMR loan is a flexible form of financing that considers recurring revenue, cash flow, customer acquisition costs and turnover rate to provide funding for growth.
Quasi- equity lending is based on the company's cash flow projections. The cost is often a combination of a fixed interest rate and a variable component tied to the company's performance. Reinvested interest can also be used at certain times. It allows a company to defer interest payments and roll it into principal until the loan matures. This loan may have a lump sum payment at the end of the loan, allowing the company to reinvest in research and development or marketing.
The risk of raising equity capital too quickly
Raising equity capital too early can be very costly for business owners. This is especially true for technology companies, which have a history of raising capital quickly from venture capital partners. We’ve seen business owners who have invested years in a company only to end up owning less than 10% of it.
There is a significant difference between raising capital at $100,000, $500,000 , or $ 1 million in monthly recurring revenue (MRR). The founder has much more choice and control if their business is growing before seeking major funding.
Raising equity capital also carries a real risk if you’re unable to execute on your plan. This could result in a lean period or prevent you from raising additional capital. Raising too much capital can also create friction with the board and stress for founders who need to achieve their goal.
As our colleagues wrote in a previous post , delaying an equity raise by just 12 months can often be a very profitable decision for many fast-growing tech companies.
A long-term partner for your growth
Choosing to work with a bank can be daunting; we know it’s not easy to take on debt. Equity may seem like a safer choice because there’s no obligation to repay a loan.
Raising equity capital too quickly can often put significant pressure on you to grow at an unsustainable pace. Starting a business is stressful enough. That’s why we prioritize creating long-term value for the entrepreneur and the business.
Please do not hesitate to contact us if you have any questions or if you think we could help you.
