With a Recession Looming, Startups Need a New Way to Raise Capital

Growth — that’s what every SaaS startup wants. But rapid expansion doesn’t come cheap. Whether it’s for marketing, sales, product development, staffing, or acquisitions, taking a software company to the next level requires access to plenty of growth capital

Raising funds is never easy — and right now, it’s harder than ever. Funding of global startups dropped 23% between April and June 2022, the largest quarterly fall in nearly a decade. With the economy slowing, venture capitalists are tightening the purse strings. At the same time, banks are asking more difficult questions — and offering less favorable terms — to prospective SaaS borrowers.

With external funding sources running dry, cash-strapped software vendors are looking to their revenue streams to bring in the capital they need to grow. Landing deals fast can be a way to solve liquidity problems, of course — but if it requires offering big discounts on annual subscriptions, it also risks lowering the business’s long-term value. 

Fortunately, growth-focused startups have another option. With new advances in financial technology, there are new ways to access cash without relinquishing ownership or downgrading value. The secret? Leveraging existing contracts to secure cash advances on locked-in revenue streams. 

Unlocking funding with fintech

To continue growing amid a market slowdown, vendors need to think creatively about the value their customer subscriptions represent. Yes, these regular payments are good old-fashioned income streams. But they are also a valuable resource that can be leveraged to unlock new kinds of funding. 

SaaS transactions are data-rich, and with a well-developed fintech stack it’s possible to use that data to seamlessly assess how long a contract is likely to run, or how well a client is likely to perform. These insights give forward-thinking vendors the ability to near-instantly offer cash advances tailored to the actual performance of the companies they serve — effectively, an up-front cash advance on future subscription revenues.   

Crucially, this kind of tech-enabled financing doesn’t involve dilution: SaaS brands don’t have to give up equity in order to access the capital they need. That’s a radical departure from traditional fundraising methods, which often leave founders and early investors with scraps instead of meaningful ownership stakes — a bitter pill to swallow both financially, and in terms of strategic control.

With fintech-enabled funding, a company’s cap table remains fully intact, giving its existing owners full control over their company’s future direction. There’s no need to swap control for cash — and that leaves the SaaS business with equity intact for future fundraising rounds or to compensate new hires.


Controlling the process

Fintech-enabled financing also offers advantages over debt financing. Such financing — effectively a form of bank loan — is the route of choice for many bootstrapped startups. But the well-trodden path isn’t always the best one. Taking on debt means dealing with vast amounts of paperwork, due diligence, and other red tape that can draw out the process over a period of many months.

For startups that are seeking to stay agile and exploit new opportunities, that kind of delay can be terminal. Debt financing also typically involves long-term commitments, and comes with covenants and other restrictions on fund usage — not to mention increasingly unfavorable warrant coverage requirements which give lenders the right to take equity down the road. In other words, debt financing also requires startups to give up at least a degree of control, and makes it harder to be responsive and nimble in the face of changing market conditions.

Non-dilutive fintech-based solutions, on the other hand, effectively turbocharge the funding process. With AI tools to assess risk based on financial information that’s already been gathered via the company’s fintech stack, it’s possible to massively streamline the financing process. 

It’s possible to apply for funding at the click of a button — and, in many cases, to get a response and access to cash almost instantly.

The economic picture has darkened in recent months, but SaaS startups can’t afford to sit things out while the storm passes. To survive, they need fast and flexible access to growth capital — and that will require looking beyond equity and debt financing, and learning to unlock the full value of their fintech stack.

published on
October 19, 2023
Ashish Srimal
Co-founder & CEO at Ratio
Ashish Srimal is a SaaS entrepreneur and executive who has built SaaS startups and led large SaaS businesses.
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