Private Equity

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What Is Private Equity, and How Does It Work?

Private equity (PE) involves a group of wealthy individuals coming together to purchase a company. Investopedia says that “private equity investment comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods.”

These investors fit two separate categories: limited partners and general partners. The limited partners receive a smaller percentage of the profits than the general partners since the general partners manage and maintain liability for the fund. Most PE firms, such as Kohlberg Kravis Roberts (KKR & Co.) and Bain Capital, have significant portfolios and are worth billions of dollars.

Another important point is that the private equity exchanges do not occur on public markets. Depending on the situation and the type of private equity, the PE firm can buyout a public company, which takes the public equity off the market, or invest directly into a private company.

When they make the purchase, a private equity firm usually does not intend to keep the company forever. Instead, PE firms will usually have an exit strategy in place at the time of purchase. Their goal is to maintain the company for a designated amount of time, improve its margins, and sell it for a profit.

What Are the Types of Private Equity?  

As mentioned in the previous section, there is more than one type of private equity. Each type involves institutional and accredited investors that are raised for different types of companies and can be used for different purposes.

These are not the only types of private equity, but these are some of the most common. Additionally, they are not always mutually exclusive from each other or from other types of financing, such as debt financing.

Leveraged Buyouts

A leveraged buyout is what most people associate with the term private equity. In this type of transaction, a PE firm identifies a company that they wish to takeover. After selecting a company, they utilize a combination of equity and debt to make the purchase. Their goal is to improve the company over several years, then sell it off to another interested group or conduct an initial public offering (IPO).

Sometimes, the firm will purchase the company in its entirety, while other times it will simply purchase a majority stake. Either way, this allows them to control strategy and direction so that they can improve its current profitability and long-term projections, therefore increasing its value.

Fund of Funds

As you can probably guess from the name, a fund of funds maintains a portfolio that includes a diverse group of equity funds, as opposed to individual companies. This lowers the entry cost, which allows individuals and industrial investors who otherwise could not enter the market to invest. Most often, fund of funds invest into hedge and mutual funds.

Fund of funds are managed management teams of professional investors. This team charges fees to the individual and institutional investors to make informed decisions regarding their assets under management.

Venture Capital

While most private equity firms buy mature companies, venture capitalists (VC) seek out promising startups which could grow to yield significant profits. Oftentimes, the portfolio companies that VC firms invest in have significant growth potential, but need outside capital to reach that potential. VC firms rarely, if ever, take majority ownership. Instead, they make a smaller investment, allowing the management team to continue as the primary decision-makers.

Profitability is not a requirement for a VC portfolio company, but a decent cash flow and solid business plan are. Venture capitalists take a significant risk with every portfolio company, since it could crash and burn without ever becoming profitable. As a result, VC firms tend to hold a diverse portfolio consisting of many investments in the $10 million range.

Growth Capital

With growth capital, the goal is to provide a mature, proven company with resources to expand even more. The idea is similar to venture capital, but it presents less of a risk since the companies are already profitable. However, this means that the potential reward is also much smaller.

Companies that receive growth capital can use it for a variety of purposes. This includes entering a new marketplace, developing new products, or making a significant sales push.

Real Estate

There is a great deal of variety within real estate private equity, which centers on the exchange of property. Some real estate PE involves small investments that are sure to yield consistent cash flow, such as apartment rental buildings. This approach invokes the more typical PE approach of buying something that is sure.

On the other extreme, real estate PE can look more like venture capital. By making speculative moves on land that is projected to hold more worth later, real estate PE take a risk but also could achieve significant profits down the road.

Distressed Funding

Distressed funding is a specific version of the leveraged buyout. In this scenario, a mature company is struggling financially. A PE firm swoops in and purchases some or all of the shares for pennies on the dollar. The firm then attempts to restructure and revive the portfolio company, so that they can sell it at a profit later.

A firm could also purchase a company just to dissolve it and sell all of their assets for a profit. Many hedge funds also focus on distressed companies, so the line between these two is not always clear.

What Are the Advantages and Disadvantages of Private Equity?

The benefits and drawbacks of private equity vary depending on what stage of growth your company is in, as well as the type of equity. For instance, venture capital benefits young, unproven companies by allowing them to obtain capital, while a leveraged buyout allows a mature company to restructure and improve.

Here are a few of the most important advantages of private equity.

Less Regulation

With public companies and companies that are sold on the public markets, there are significant regulations. Any company that conducts an IPO must comply with the myriad of terms of the Security and Exchanges Commission.

However, private equity is available to a much smaller pool. Regarding private equity, Investopedia says, “there is less concern from the SEC regarding participating investors' level of investment knowledge because more sophisticated investors (such as pension funds, mutual fund companies and insurance companies) purchase the majority of private placement shares.”

Mentorship

Since a private equity firm’s success depends on the success of your company, they will care about your business. Oftentimes, this means that they will want to be involved. With many PE firms having years of knowledge in your industry, their mentorship and opinions should help you improve your business.

Significant Capital

Compared with other means of raising capital, private equity usually provides the most. Alternatives such as angel investors and bank loans do not get close to the amount of capital that private equity can provide.

Most private equity investments are upwards of $100 million. While these investments go into companies that are worth much more, this type of capital injection can still produce significant results.

However, there can also be some major disadvantages to private equity.

Lose Equity

The entire premise of private equity is giving up a percentage of the ownership in your business for capital resources. However, giving up a majority of your company’s equity is nothing to ignore. Giving up all of our equity makes it difficult for you to obtain additional financing down the line.

Lose Control

While the mentorship provided by the PE firm can be helpful, it can also be frustrating. When the management team and the firm have different ideas about the direction and practices of the company, there can be significant conflicts.

What Types of Companies Use Private Equity?

Because of the variety of funding options that fall under the umbrella term of private equity, there is no singular type of company that can utilize it. However, different company types fit different PE types.

To be eligible for leveraged buyouts, distressed funding, or growth capital, your company should be proven and mature. This does not necessarily mean that you are currently profitable. The goal of these investors and firms is to revitalize a company that has already shown what it can do, but is struggling.

To that end, most PE firms invest roughly $100 million into their portfolio companies. This means that businesses worth significantly less are not common targets for leveraged buyouts or distressed funding. It also means that these types of PE firms have a consolidated portfolio, with a few very large companies. However, younger and smaller companies can still get in on private equity through venture capital.

What Does RevTek Offer?

At RevTek, we combine the benefits of different financing options to give your company the best solution. We provide revenue-based financing that works for each individual company. We work with you to craft a repayment plan based on your MRR. By working together to decide on a percentage of future revenue, we avoid taking any control or equity in your company.
Our process and terms are simple, allowing you to obtain as much as $2 million in growth capital. You can use the capital to meet any of your business’s needs and improve your sales and marketing, expand your broadband network or broadband development, acquire new equipment through purchase or equipment leasing, or develop new services.  Contact Us today.

Funding Solutions from RevTek Capital

If you are looking to raise capital for your startup, choose RevTek.

Our experienced team can provide you with the money you need to expand your tech startup.

Contact us today to learn more about how we can help your business grow.

If you are looking to obtain growth capital or move into a new market, contact us today.

Download our free eBook

"Scaling Valuation Secrets for SaaS Companies"

SaaS Pricing Models and Strategies

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With the influx of the Software as a Service (SaaS) business model over the past several years, many new pricing strategies and models have been implemented. There are a wide variety of viable options to choose from depending on your target market and price points. In this post, we will explore a few of the most common SaaS pricing models and SaaS pricing strategies.

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SaaS Pricing Strategies

Before deciding which specific model to choose, a successful SaaS company will carefully plan their long-term pricing strategy. Without a legitimate strategy to inform pricing options, the whole plan and company can easily go awry. These are a few of the most common pricing strategies that SaaS companies should implement.

Penetration

With this approach, the whole goal is to gain as much of the market as possible right off the bat. To do that, a company must price their products lower than their competitors to encourage customers entering the field, as well as those who are already established with competitors.

While offering SaaS products at a price with minimal profit may seem like leaving money on the table, this approach allows a company to quickly enter the market. Once they have proved their worth to their customers, they can begin gradually raising their prices.

Skimming

This method serves as the exact opposite of the penetration approach. Instead of starting low and gradually raising the price, this method involves starting high and gradually dropping it.

This is a smart way for companies with a unique SaaS product to enter, as the early adopters will be willing to pay more. As the product loses its grandeur and competitors try to penetrate the field, dropping the price allows you to maintain your customers and reach new markets.

Cost Plus

In this strategy, the whole goal is to ensure profits from the very beginning. The price is based on the cost per unit combined with a designated amount of money that the company hopes to make per unit.

This method is simplistic in that the price is always based on the cost. While this does ensure that you make a profit, startups using this approach will probably have difficulty penetrating the market.

Value-based

Instead of focusing on your own costs in providing the solution, this strategy focuses on the value from the customer’s perspective. Of course, this value is subjective and can vary depending on the user. This means that you need to understand exactly how your users will use your product and what benefits it will provide them.

Successfully using this approach requires significant understanding of your customers and how they feel about your product and price points. When done correctly, you can gain significantly more profit per customer than with many of these other strategies.

This discussion of strategies is especially important in the determination of SaaS pricing strategies. Many startups begin without any clear competition or a completely new SaaS solution, which makes it very difficult to know what the prices should be. As Lincoln Murphy so aptly puts it, “no one knows what the best price for your SaaS offering should be.”

By working through some strategies, however, you will be able to generate a better idea of what your pricing approach should be. Once you determine your strategy, you can make better, more informed decisions about your actual model.

Pricing Models

Done are the days of simple flat rate pricings. For SaaS startups and companies, a flat-rate pricing system severely limits their income potential, as their high usage customers will receive significantly more value. Usage-based models have been used by a few companies, but the inconsistency in income for you and the prices for customers causes most people to avoid this model.

This has led to a lot of creativity in developing models that make sense for the customers and provide legitimate income for the companies. Here are a few of the most common models.

Tiered Pricing

One of the most common pricing models is tiered pricing, which offers different plans for different personas. Oftentimes, this will range from free users, who have very limited functionality, all the way to large enterprises and businesses. Most companies who use this pricing model have pricing pages with three or four different options.

Price tiering allows you to effectively market your product to multiple personas, greatly expanding your pool of potential customers. By not overcharging or undercharging any of your customers, you maximize each customer’s value and provide them with the tools they deserve. This model goes extremely well with the value-based and cost plus strategies.

Price Per User

This is another common model for SaaS companies. In this setup, the company designates a price per user, and that price stays the same regardless of how many individuals are on a given plan. This arrangement is extremely simple, allowing the customer to easily calculate the consistent costs and the provider to earn the same consistent income.

While the simplicity is appealing, this model is not ideal for large enterprises. Ryan Law of Cobloom says it this way: “by charging per user, you provide a reason to avoid adding new users to the tool. This also provides an incentive to cheat, and wherever possible, share a single login between multiple team members.”

Per Active User

A variation of the price per user model, this approach allows the customer to pay based on how many people actually use their product. In some ways, this is similar to the usage based approach, except that the variation occurs with the number of people not the quantity or types of use.

This model encourages enterprises to sign up as many of their members as possible, knowing that they will only be required to pay for those who end up using it. Paying based on the number of users maximizes value for the customer and ensures that you don’t overcharge or undercharge.

It is important to point out that these are not the only models. Other common models include per feature pricing and premium pricing. Another important thing to mention is that these approaches are not mutually exclusive. Additionally, elements such as free trials can be tacked onto any of these pricing models, particularly if you are working within the penetration strategy.

How Does RevTek Help SaaS Companies?

Regardless of which of these SaaS pricing strategies or models you have or choose, your company will need an injection of external capital at some point. With their reliance on relatively small monthly payments and a lack of upfront payments, SaaS companies in particular need outside investments. That’s where we come in.

We specialize in providing capital to SaaS companies just like yours. Our process is simple. We provide you with the growth capital that you need to expand your operations and increase the value of your SaaS business in exchange for manageable monthly payments based on your monthly, recurring revenue.

Unlike others, we do not take any equity, a seat on your board, and our terms are simple. To be eligible, you do not have to be profitable, but you should have a predictable recurring revenue of at least $50,000 a month. If you are a SaaS company, learn more about how we can partner with you.

How to leverage SaaS, Recurring Subscription Revenue can help you meet your Valuation Goals

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One of the biggest challenges for any startup is growing its business efficiently. Recent turbulence in the economy has seen investors growing nervous about how much cash early-stage companies need in terms of “runway,” or put another way, how many months of burn companies need to reach the next milestones. This minimum cash runway has increased from 10-12 months to 18-36 months. Raising capital has become more difficult and is taking longer. The difficulty is due to recent decreases in public valuations and the trickle-down impact on smaller privately held SaaS and recurring revenue businesses. Due to lower valuations, companies get backed into achieving greater milestones to reach their valuation expectations. Higher growth performance is needed to attain the equivalent valuations as before.

The above factors lead to increased cash needs to extend runways and higher growth. The need for more cash with more expensive equity options forces founders to seek alternative sources of capital to extend their runway and preserve dilution.

Industry data show that top-performing SaaS / Recurring Revenue companies spend 40-50% of their ARR on sales and marketing. So, how does a Founder achieve higher growth without diluting? By leveraging their subscription based recurring revenue with a creative, financing partner. At a basic level, growth debt alleviates a large part of a business’ working capital needs. And RevTek’s lines of credit create the ultimate flexibility by only paying when you draw our debt financing.

We take a lot of time upfront to understand a company’s business. We are long-term partners, not transactional, and work to create a capital structure that allows a company to grow and access capital as needed.

At RevTek, our creative financing lets founders inject an exact amount of capital to cover their customer acquisition costs and align the repayment term with future revenue.

We help accelerate growth by offering flexible lines of credit with interest-only periods so you can maximize top-line revenue and enterprise valuation.

We have helped companies with the following:

• Extend runway and reach milestones necessary for a successful exit

• Grow Revenue while raising equity at lower valuations and less dilution to owners/founders

• Accelerate growth and further develop technology to increase valuations for future exit or equity raise

At a basic level, our financing alleviates a large part of a Recurring Revenue SaaS business’ working capital needs to grow more effectively and efficiently…without excessive dilution.

If you are looking to raise capital for your startup, choose RevTek. Our experienced team can provide you with the money you need to expand your tech startup. Contact us today to learn more about how we can help your business grow.

Immediately access our free eBook "Scaling Valuation Secrets for SaaS Companies" Scaling Valuation Secrets for SaaS Companies (revtekcapital.com)

 

Ways to Raise Capital for Startups

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No matter how you spin it, sufficient capital is a necessity for the growth of a successful startup. As Finextra says, “capital is the basic ingredient for any business to thrive.” However, raising capital can be a difficult, time-consuming endeavor for any startup company. Let’s explore some ways to raise capital for startups.

You may have a strong business plan and need to raise startup funds, or you could also be a small company looking to raise the capital to expand your reach or change your market. Regardless of where you sit on this spectrum, you almost certainly need capital to continue moving forward.

Whatever your needs are, there are several different ways that you can go about raising money for your small business. Here are a few of the ways that you can raise startup capital.

Crowdfunding

In short, crowdfunding is promoting your business idea and encouraging people to invest. There are a variety of crowdfunding platforms, including gofundme and kickstarter, that can help you gain support from investors.
Here are some of the benefits of crowdfunding:

  • No debt: One of the most noteworthy benefits of crowdfunding is that you won’t have any significant debts to pay afterward. Almost any other business loan you get will involve significant debt that includes interest rates.
  • Free advertising: Crowdfunding through different platforms allows you to promote the cause, but it also lets the people promote your business for you. Through sharing on these sites, as well as social media, your investors and potential investors can also function as your advertisers.

Here are some cons of crowdfunding to raise funds for your business:

  • No assurances: As you promote your cause and ask the general public for donations, there is no guarantee how much money you will receive. A small startup could have a goal of $15,000, but only receive $2,000. While that smaller amount of money may still be helpful, it is difficult to plan ahead when you do not know how much support you will garner.
  • Competition: You will not be the only startup financing their growth through a crowdsourcing platform. Your competition may also pitch their similar business model on a crowdfunding platform, meaning that you may lose out on capital because another company took attention away from yours.

 

Angel Investors

Sometimes, an individual or group of individuals will make what is called an angel investment in your company. This means that the person or persons will provide significant capital in a business startup.
Here are some of the primary benefits of angel investors:

  • Risk: Generally, angel investors invest in risky startups. If they like your idea and business model, they will provide finances even if you have yet to prove yourself. This is very different from banks, who need to see profitability before they invest.
  • Mentorship: Typically, angel investors will have experience in the field you are in, which allows them to come alongside you, help you understand the business or industry, and advise you on decisions and future plans. Having this sort of partnership can aid the growth and success of your business.
  • No debt: Most angel investors do not require you to return the money that they provide you, which differs from all other options except crowdfunding.

Here are some of the biggest drawbacks of angel investors:

  • Small Amount of Capital: Compared to the amount of money that you could receive from a venture capital loan or the bank, angel investors usually don’t provide that much capital. There are exceptions, but generally, angel investments are less than $100,000.
  • Loss of Control: According to The Balance Small Business, “your angel investor will have a say in how the business is run and will also receive a portion of the profits when the business is sold.” This differs from bank and venture capital models, but this makes sense when you remember that you do not have a debt to repay.

 

Venture Capital

Venture capital is financing for startup companies that need capital. Venture capitalists are gambling on the success of your business, so their rates are steep. Here are some of the primary benefits:

  • Risk: If you can prove that you will be successful, venture capitalists will invest before you demonstrate profitability.
  • Capital: Most venture capitalists will provide significant dollar amounts, especially when compared to bank loans.

Here are some of the main drawbacks of venture capital:

  • Interest: Because of the risk involved, venture capital generally involves exceptionally high interest rates. This can make paying the loan back a difficult process that lasts years longer than it would for a bank.
  • Control: In addition to the interest rates, venture capitalists need some control in your business to make their risky investment worthwhile. This can lead to conflict or your business operations changing from your original intention.

 

Bank Loans

In theory, this is the simplest of the types of loans, but in reality they are quite complicated. Here is the benefit of working with banks.

  • Cheap interest rates: This is the lone benefit for SaaS and other similar tech companies. The rates are significantly lower than venture capital.

Here are the cons of working with banks:

  • Time-consuming: One of the worst parts of applying for government loans is the time involved. Receiving venture capital or even crowd sourced funds can be quick. The bureaucracy involved with bank loans complicates and extends the process significantly.
  • Must be Profitable: This all but prevents most tech startups from receiving bank loans.

 

How does RevTek Raise Capital for Startups?

RevTek helps small business in the tech field gain the capital that they need to expand and surpass their current levels of success. RevTek provides the combination of capital and freedom that can help you gain the capital you need.

Our model is quite simple: we provide the capital, and you pay it back in manageable monthly payments based on your monthly, recurring revenue. To be eligible, you do not need to be profitable, but you should have a predictable recurring revenue of at least $50,000 a month.

Here are some of the major benefits of gaining capital from RevTek:

  • We don’t take your equity. RevTek has no interest in gaining power or taking away your equity. We want to ensure that you succeed.
  • We don’t take control. Many of the options provided to you involve losing some control of your business. Whether it be an angel investor or venture capital group, they are looking for some share and power in your business. Not RevTek. Our goal is to provide you with the capital that you the need to carry out your effective business plan or expand into a new market.
  • Quick and simple. Many of the methods mentioned above for raising capital are quite complex, time-consuming, and can leave you feeling unsure of the end result. At RevTek, we provide a painless, quick process.

If you are looking to raise capital for your startup, we want to help you. Our experienced team can provide you with the money you need to develop or grow your tech startup. Contact us today to learn more about how we can help your business succeed and grow.

Debt vs. Equity Financing Pros and Cons

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Whether you are a startup company looking to get off the ground, or an established business looking to push to new heights, you will need outside capital. Without an injection of capital, you likely will not be able to expand your company. For most businesses, there are two primary ways of obtaining this capital: debt and equity. Let’s explore debt vs. equity financing and the pros and cons of each.

Debt Financing

In terms of obtaining capital, debt financing is what people generally think of. This involves an entity such as a bank, a government, or another business, providing capital that will be repaid with interest. Debt financing encapsulates business credit cards, business loans from the government, and bank loans.

Debt financing has some significant advantages:

  • Maintain sole ownership of your business: This is arguably the most significant benefit of debt financing. You will probably have to offer some form of collateral, but you will not have to give up any control or ownership.
  • Keep future profits: When you grow your business, the accounts receivable to the bank does not increase. Regardless of your business’ growth, your debt will only increase based on the interest rate.
  • Flexibility: Another important aspect of debt financing is the flexibility it provides you. Once you obtain the line of credit or the loan, there aren’t restrictions concerning what you can spend the money on. This allows you to use the money as growth capital on whatever you see fit.

While these advantages are important, there are also some important disadvantages to consider.

  • Requires profitability: This is true for all options outside of personal credit cards. Banks and the government do not want to assume any risk in financing small businesses, so businesses that have yet to prove profitable usually cannot obtain these types of loans.
  • Complicated process: The process of obtaining a loan from the bank or government is extremely time-consuming because of the significant vetting involved. Once you obtain the money, the loan repayment plan can be confusing as well.

Equity Financing

While debt financing involves receiving capital that will be paid back later, equity financing is when a company receives capital in exchange for equity (or ownership) in their company. With this arrangement, you do not have to pay the money back, since the payment is partial ownership. Depending on the needs of the company and requirements of the investors, a company can give up a small portion of their equity or all of their equity in a single transaction.

Equity investors typically want to invest in companies that have significant profit potential so that their shares increase in worth. However, some equity investors will also invest in older companies that are restructuring or expanding. Angel investors and venture capitalists are the primary sources of equity financing.

Here are some of the most noteworthy advantages of equity financing:

  • Significant capital: Compared to bank loans, equity financing can raise significantly more money for your business to use. This is particularly true for venture capital, where a group of investors collectively partners with your business. Having that increased cash flow allows you to expand to create even more capital.
  • Risk: Most equity financing providers are not concerned with current profitability. Instead, they are interested in the potential for your business plan to produce long-term profits. As a result, venture capitalists and private equity companies seek out young companies with significant potential, which also presents significant risk.
  • Liability: Because venture capitalists are taking at least partial ownership in your company, you are no longer completely responsible in the case that your business fails. As WealthForge puts it, one “advantage of equity financing is that the investor assumes all the risk.”

However, equity financing also has some cons that you need to consider before pursuing it.

  • Lose equity: This is a rather obvious drawback of equity financing, as the whole premise is to give up some equity to receive capital. Even though it is obvious, it’s worth mentioning again. Once you give up all of your equity, it becomes difficult to obtain additional financing further down the line.
  • Lose control: Private equity firms and other equity investors typically provide some mentorship, which is helpful. However, most of these groups will put someone on your board and want a voice in your company. When you and the firm have different ideas about the direction and practices of your company, you may experience a significant conflict. Your vision may no longer direct the company.

What Does Revtek Capital Offer?

At RevTek Capital, we understand the complications and challenges that come with borrowing money. Whether it be a bank loan or another source, every type of loan has its drawbacks. That’s why we’ve simplified the process for small tech businesses with recurring revenue.

Our model is quite simple: we provide the capital, and you pay it back in manageable monthly payments based on your monthly, recurring revenue. To be eligible, you do not need to be profitable, but you should have a predictable recurring revenue of at least $100,000 a month. The benefits are substantial:

  • We don’t take your equity.
  • We don’t take any control or ownership.
  • Our terms are simple and easy.

If you are looking to raise capital for your startup, choose RevTek. Our experienced team can provide you with the money you need to expand your tech startup. Contact us today to learn more about how we can help your business grow.

How to Qualify for SaaS Financing

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As a SaaS business owner, one of the most exciting days for an early-stage company is when the business is up and running, and you begin turning a profit, even if that profit is quite small. It is proof that all your hard work and efforts have been worth it, even before significant sales and marketing show up.

Up until this point, you may have been able to fund the business yourself or with the help of family and business partners, but it’s not realistic that you can bootstrap long term. Accelerating your business growth and turning early-stage wins into reliable revenue requires an influx of funding from another source. However, you, like many other SaaS companies, may not know where to start.

What are your financing options, and how do you know if your SaaS business qualifies?

SaaS Funding Solutions

You have several options when it comes to financing your SaaS business. However, not all these solutions will be the best decision for your unique business. Three main categories identify ways to raise SaaS Capital.

Debt Financing

Venture debt financing operates much like other debt financing options such as a mortgage or a car loan. In this scenario, your business takes out a traditional term loan with a bank or private company and makes regular monthly repayments with interest. These loans may carry low-interest rates but do not often offer large loans for the full amount a business truly needs to increase growth.

Revenue-based financing is a debt financing option that bases repayments on each month of recurring revenue rather than a fixed payment plan. Therefore, you will never have to make a payment that you cannot afford.

Equity Financing

This form of cash flow exchanges equity in the business for funding. Often referred to as venture capital or angel investors, an individual or firm will provide funding for your business or portfolio company in exchange for a seat on the board, percentage of the company, or other decision-making positions. With this option, you are often not required to pay back the funding up front, but you lose some control of your SaaS Company.

Qualifications for SaaS Financing:

High-Selling Product

The first step in qualifying for SaaS financing is ensuring that your business offers a highly sought-after product or service that is a market fit. Your business will not do well long term if the market is highly saturated with similar products or if you do not meet a specific pain point for your target audience during product development.

Monthly Recurring Revenue

Monthly Recurring Revenue (MRR) is the predictable revenue that you expect to receive each month. This type of revenue occurs when you run a subscription-based service model. Having a predictable stream of income each month will allow you to qualify for SaaS financing because financers lending to SaaS businesses know you can make repayments. Typically, the higher your MRR, the higher the dollar amount your business can qualify for.

High Gross Margins

Having high gross margins after all costs to run the business have been paid indicates that your company spends money well and makes wise business decisions. High gross margins mean that your company has more revenue to spend on other business areas and indicates that you will pay back the money you owe because you are not operating at a deficit.

We Can Educate You More on SaaS Financing Options

These available SaaS funding programs can accelerate your business growth early on and provide you the funding your company needs to get started. You no longer have to wonder if your family member or business partner’s cash flow will be enough to carry your company in the beginning stages.

However, you and your team may not immediately know whether to choose debt or equity financing for your early-stage SaaS company. Our knowledgeable and experienced team at RevTek Capital would be glad to discuss your product/service and which option would be optimal. We see things in your business that most lenders don’t and have unique financing insights that we’d love to share with you.

If you are ready to ask our business leaders questions about SaaS financing solutions, call our office at (480).332.0399 or fill out our online contact form.

The Basics of Tech Startup Funding

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Silicon Valley knows that raising capital, in the beginning, is the most challenging stage of a startup for many tech company founders. They are aware of a pain point in the technology market or have an incredible new product to sell, yet initial funds inhibit them.

The world of technology is the fastest growing industry, and it shows no signs of slowing down. It is more important than ever to obtain cash at the beginning of your company’s journey so you can explode with the growth you project.

However, ample startup funds never have to deter you from launching your tech business. There are different tech startup funding options available, so you can generate the company growth you desire right from the start.

There are two basic categories of funding options: funding through debt financing and offering equity in exchange for funding. All of the various ways to raise capital fall under one of these two categories.

Debt Funding

Securing capital through debt that you must repay with interest is a financial choice that most people are familiar with, whether from personal or business experience. Debt funding for your tech startup is the same. Securing a bank loan with collateral or using credit cards to fund your finances is a quick way to get your company up and running.

However, there are higher interest rates for new tech startups because banks know the risks involved. Debt funding can have negative consequences if your company cannot pay back the money in a short time. This is because you may quickly find yourself in more debt than intended and saddled with debt for years to come.

Equity Funding

Seeking venture capital by exchanging equity for funds is a popular form of raising capital for tech startups. With this experience, investors produce funding in exchange for a percentage of ownership in the company. Equity funding is typically secured in early-stage Series A funding when there is still significant equity available.

Venture investors, including angel investors, are in the business of funding startups to earn a percentage of the profits. This option is excellent for entrepreneurs who do not wish to take on debt, but they run the risk of losing company control with every venture capitalist that comes on board. If your company gives away more than 50% in equity, you no longer own the most significant stake in your company, which can be detrimental when making decisions or selling the company.

Funding with RevTek Capital

Debt funding and equity funding have pros and cons that define them as different finance options for your tech startup company. If you have the next fantastic product for the technology industry, but cash is a problem, these solutions may be the catalyst you need for significant initial company growth.

Funding with RevTek Capital falls under the debt funding category but without the same amount of risk as with most debt options. We provide what we call Revenue Based Financing, which is an excellent finance option for tech startups already producing recurring monthly revenue but need a boost in capital to reach the next growth benchmark.

If you have any questions about the difference between debt funding and equity funding and would like to discuss the best path forward for your tech startup, we would be honored to help. Give us a call to our office at (480) 332-0399, and a finance specialist will get back to you on how to get you the cash your company needs for massive growth.

SaaS Company Valuation: Multiples and More

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For any Software as a Service (SaaS) company, finding effective financing solutions can prove difficult. Because SaaS is a fairly new business model, many SaaS owners do not know how to accurately value their companies, as there is not a one-size-fits-all equation or standard.

These figures are not only important for long-term selling plans but also for the present as you try to grow your business. Without a correct SaaS valuation, you will severely limit the financing options that are available for your business. We want to help you understand SaaS company valuations and the impact they have on your financing options.

How to Determine the Value of a SaaS Company?

Determining the valuation of your company can be a difficult process that involves the input of outside investors. However, the valuation of SaaS companies on public markets differ from those of private markets, pure-play, and B2B SaaS companies.

For fast-growing public SaaS companies, this valuation number is easily determined. The most common formula for SaaS companies on the public market is Enterprise Value (EV) divided by annual revenue. The Enterprise Value is determined by adding up equity and debt and subtracting all cash on the balance sheet.

Determining the value of high-growth private SaaS companies is much more difficult, however.  One of the best multiple-based formulas for determining the value of your private SaaS company goes something like this: Annualized Recurring Revenue (ARR) x multiple = Company Value.

Factors that Affect the Valuation of a SaaS Company

Multiples

The difficulty with SaaS is that there is not an exact science for determining the SaaS revenue multiple. A multiple is an agreed determined number that will be multiplied against the revenue to determine the value number. To develop this number, anything that affects future monthly revenue, cash flow, gross margins, or the growth rate will be a determining factor.

Thomas Smale, CEO of FE International, says in an article about SaaS valuation that “hundreds of different data points” impact the multiple. For him, “these boil down to the transferability, scalability, and sustainability of the enterprise,” and include factors such as financials, traffic, operations, niche, management teams, and customer base. Deciding which multiples to use for your valuation will largely impact the outcome.

Revenue Growth

Another factor that can influence the value of your SaaS business is revenue. The revenue retention and growth of your company over the last 12 months to 24 months can give great insights as to how your company will continue to grow. A study conducted by SaaS Capital Insights found that “for every 1 percentage point increase in revenue retention, a SaaS company’s value increases by 12% after five years.”

Retaining revenue is of particular importance to your company’s valuation because it impacts many other factors, such as your actual revenue, your addressable market, and growth rate.

Churn

Conversely, churn, which is the loss of expected ARR due to loss of customers or subscriptions, can lead to negative valuation. Some churn is always expected, but if churn is increasing year over year, your company will not be valued at a rate of high profitability.

What Impact Does This Valuation Have on Financing Options?

Regardless of what type of financing options you are seeking, the value of your company will influence the terms of your SaaS financing. For Venture Capital and other types of equity financing, the higher the value, the less ownership you will have to give away.

While higher valuation generally helps you keep more equity, you shouldn’t always choose the investor that values your SaaS company the highest. More influential firms may offer lower valuations but are able to bring expertise and relationships that will ultimately increase the value of the company over time.

In terms of debt financing, valuation can also impact what types of interest rates, terms, and collateral requirements are included. As the chart below shows, there are a variety of debt and hybrid funding options that SaaS companies can choose from depending on their needs and expectations.

From https://www.saastr.com/saas-companies-can-maximize-value-debt/

SaaS Company Valuation

Further down the road, the valuation of your company will have a significant impact on your profits when you try to sell your business. While choosing a lower valuation may allow you to obtain ideal financing options earlier, it also can limit your profits. Therefore it is wise to weigh the cost against your plans for the future.

How does RevTek Finance SaaS Companies?

Here at RevTek, our goal is to give you the best possible financing model that will increase the valuation of your SaaS business. Our model is simple: we provide you with growth capital that you need to expand your operations (and therefore, the value) of your business in exchange for manageable monthly payments based on your monthly, recurring revenue.

We don’t take equity, we don’t need a seat on your board, and our terms and execution are simple. To be eligible, you needn’t be profitable, but you should have a predictable recurring revenue.

To begin a conversation about how to use your SaaS company valuation to gain financing in order to grow to the next level, contact us at (480) 332-0399 to schedule an appointment.

How to Start a SaaS Company

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So you want to start a SaaS business? If you are willing to put in the time, research, effort and practice patience, there is no better time than the present to jump into the software as a service industry. With many businesses moving to the digital world and finding new ways to streamline services and communication, there are unlimited ideas in the market to help people do business better.

It is not only expert software developers, techies, or investors that succeed in starting a SaaS business. Anyone with a good idea, determination, and willingness can be successful at running a SaaS startup.

Outlined below are the basic steps to starting a SaaS Company to help get the gears of your mind turning and a stepping block to start from.

Determine Your SaaS Product

It goes without saying, but before you can begin building a program, seeking investors, or filing paperwork, you need a solid Software as a Service idea. Since you are still reading, the odds are pretty high that you may already have an idea or are at least familiar with the industry and know what part of the market you might fit into.

The key with determining what product you will market is finding something that people want or need that you know enough about or are willing to learn enough about to spend the next several years of your life dedicated to. Starting a company simply for the money with no personal interest is often not a recipe for success.

For When You Have an Idea:

If you already have a service idea in mind, great! You are a step ahead of the game. The key now is to make sure that your idea is needed and make sure that the market is open. For instance, trying to develop a ride-share app to compete with giants in the SaaS industry such as Lyft or Uber is not your best bet.

If your idea is geared toward fixing a pain point that you know is experienced and you can’t find a fix for it, you are on the right track!

For When You Need an Idea:

The best ideas are developed when you personally have dealt with a pain point or issue in an industry and know that a new app or add-on would be a welcome help. For instance, developing an app that is geared towards a particular industry such as food service tabs or office communication. When you know that the addition of a SaaS application would enhance the lives of it’s users and isn’t already available, you are ready to begin.

Assemble Your Team

You may be a superhero able to take on starting and running a business all on your own, but many are not. This is when having a co-founder comes in handy. This does not mean asking a friend who you get along with to help run a company, but finding a business partner who you can work well with that will bring different skills to the table. If you are more creative, finding a co-founder who is more analytical and business oriented may benefit you, and vice versa. 

You will also need to assemble a team of experts to do the work. Even if you are tech savvy or involved in the software business, no man is an island and can be everywhere at once. Having a team composed of developers, designers, project managers, content marketers and more will ensure that every base is covered and nothing falls through the cracks. Assembling a team that is trustworthy, dependable, and dedicated can make all the difference in your companies’ success.

Build Your Design

It seems counterintuitive, but it is not important to have every aspect of the product worked out and in perfect condition before developing or launching the service. In many cases, it is after a launch that errors or gaps are found and tweaks need to be made periodically, it is likely that your service will never be perfectly complete.

Even if you think you’ve developed the perfect product, new information can change things quickly therefore it is better to launch a prototype to ensure that your time and efforts will be welcomed and pay off.

A prototype or minimum viable product is essentially a draft. This includes creating a landing page for your brand with the basic functions necessary to begin use of your service. This is a helpful tool when seeking investors because it allows for them to see a clear picture of what you are pitching, rather than complicated or technical jargon.

The first users or early adopters of this product will help give feedback by testing the product and allowing you to assess the overall user experience and how they interact with specific aspects of your service. Employing a prototype or MVP helps you to publicly and officially launch an already tested and efficient product.

Market Strategy

Once you have a product to work with, it is time to develop your Go-To-Market Strategy. Before advertising your product, it is wise to conduct plenty of market research to find out where you fit in and who your target audience is. You must decide what size of business will be your target market, how high the relationship touchpoint between your staff and potential customers will be, what type of plans you offer, and what advertising resources you will use.

Many of these decisions will be determined by the number of users you acquire and may change as your business grows. Most mistakes or failures in the SaaS world are due to lack of forethought and research so it is always smart to be a step ahead and thorough in your marketing plans.

Pricing Models

It’s obvious that your pricing model is important to the success of your company but the process involves much more thought than picking a number and running with it. You must first decide what type of model you will launch with and then reassess and adjust as necessary.

A few Pricing Models and Strategies to choose from are: Flat Rate, Tiered, Per Feature, Free with Ads, or Free Trials. The option you choose will depend on the type of service you offer and amount of users you wish to support.

Financing

The timing of this step is actually very subjective depending on your situation. If you are investing into the company yourself or bankrolling the first few phases you may be able to postpone searching for investors and financing. But if all you have is an idea and shallow pockets, you may need to seek out investors before making any real moves like hiring a team of developers.

There are many different approaches to financing your business, each with it’s pros and cons. Because every scenario is different, we recommend familiarizing yourself with the options and seeking out professionals to help guide you. 

At RevTek Capital, we specialize in Revenue Based Financing that allows you to retain complete ownership and control of your company at low monthly costs. Contact us at (480) 332-0399 to discuss if a partnership with RevTek Capital is the best way for you to gain financing for Starting a SaaS Business.

Capital Budgeting for SaaS Companies

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The capital budgeting steps for Software as a Service (SaaS) businesses are different from traditional capital budgeting decisions. The reason for this is the value of SaaS is its high internal rate of return (IRR) and low operating cost.

With many companies, investments are often made into fixed assets or developing new products, more efficient production processes, and other physical aspects. However, there isn’t a physical product being offered in a SaaS business. Because of this, capital budgeting projects must evaluate the potential in other areas of business that will bring the highest rate of return each year.

Capital Budgeting Process Steps

Below are the steps to consider when Capital Budgeting for SaaS:

  1. Create Goals

The process of capital budgets does involve a high degree of numbers and figures. Still, the board that will accept or reject the budgeting plan does not need merely to see numbers. They need to hear goals. 

What defines long term success? What steps will be taken this year towards that goal? Planning each step of the big picture by year will ensure that you are on target long term. These short term goals should be flexible and adjustable to each investment project. 

A capital budgeting plan should lead to goals and direction before getting into the details of the budget.

  1. Collaboration

The best way to ensure that your SaaS business sees success in the upcoming year is to collaborate between departments towards a shared vision and goals. Each department should be transparent in financial planning. Companies have a higher success rate when competition between departments is expressed in the open rather than closed-fisted about sharing information. 

It is helpful to know how many departments might benefit from the project before determining the net present value (NPV). This knowledge will aid in the decision making and allocation process.

  1. Estimating

This step is where the numbers of capital budgeting come into play. The ultimate deciding factor of investment is deciding which present value of cash will lead to higher future cash flows. When deciding which projects to fund, one key is determining the time value of each potential investment’s money. 

Which project estimates a higher return if invested now vs. later in the future? Essentially, which investments are more time-sensitive? These projections for your potential investments are the most significant determining factor in which direction to set your budgeting decisions.

  1. Tracking

Once it is determined which projects will be most beneficial to this budgeting cycle, it is essential to implement tracking procedures to measure success. Recording costs and benefits along each project will help determine if a course correction is needed or if a project needs a significant adjustment. 

Having detailed tracking will also help in subsequent years of budgeting to determine future project success and give board members or capital investors presentation materials.

  1. Securing Capital

This step is undoubtedly the most crucial for capital budgeting. It is not the last step in the budgeting process but should be considered throughout each stage along the way. Many SaaS businesses are working with existing capital when developing a budgeting plan. They often conclude that they need to seek new investment opportunities to grow to the next step.

Likewise, start-up SaaS companies need to have these previous steps in place before seeking investment capital. Knowing your goals, estimations, and business procedures before seeking capital will ensure a more efficient process. It is also essential to consider your capital investments and payback periods in the capital budgeting process.

Your Partner for the Capital Budgeting Process

At RevTek Capital, it is our goal to assist you in securing capital for your SaaS business. Whether you are an established brand seeking the next step in growth or a relatively new start-up, our expert staff of experienced entrepreneurs can assist. We not only assist in your capital needs but are available to answer questions about the capital budgeting process and can help set your business up for success long term.

Contact us at (480) 332-0399 to schedule an appointment and consider partnering with us for your capital budgeting needs.