How to Raise Capital Without Diluting Equity – Ethan Singer (Co-founder, Fundabl)
Peter interviews the Co-Founder of Fundabl, Ethan Singer. Fundabl is software that helps startups by creating the opportunity to receive upfront growth capital to help them scale. It is the funding solution with no dilution! Listen to this interview to learn how you can get the capital you need without giving up your equity.
[00:00:00] – Peter
Okay, so we’re here with another episode of SaaS Founder interviews and today I’m talking with Ethan Singer from Fundabl. Hey Ethan, great to be with you. Do you want to give us a little intro about yourself and what you do?
[00:00:12] – Ethan
For sure. It’s so great to be here. So I am the Co-founder at Fundabl, as I’m sure you can see. So effectively what we do is we monetize a business’s recurring revenue contract and we provide them with up to twelve months of their future revenue contracts upfront instead of waiting to receive that payment weekly or monthly from its clients. Effectively we extend a business’s cash runway by bringing forward those payments that they would have received at a future period of time.
[00:00:45] – Peter
Great. Okay, so we were just discussing how this is a category that we’d call receivable financing, right?
[00:00:52] – Ethan
[00:00:53] – Peter
So it’s essentially receiving something like a loan based on your projected MRR and then giving you some cash readily available within the business to use to grow. Is that summarised?
[00:01:09] – Ethan
There’s a few nuances. So we’re actually not alone. From an accounting standpoint, it’s a clean asset sale of future accounts receivable. So what actually happens is we’ll purchase a businesses future recurring contract for we call it a slice in time. And as those payments come through in that monthly or quarterly period, they’ll get remitted back to us. So we don’t take security over the entire business. There’s no requirement for personal guarantee, directors guarantees, there’s certainly no dilutive instruments involved. Effectively we purchase those contracts for that slice in time and as those payments come through monthly or weekly from those clients, they just get remitted back to us.
[00:01:49] – Peter
Okay. And so once that term on that period comes to an end, then the transactions finished.
[00:01:58] – Ethan
You’ve obviously right. That’s exactly right. So effectively there’s a lot of businesses out there, specifically software and subscription businesses that get paid from their clients on a monthly basis. It’s usually month to month. However, for the majority of those businesses, those clients, they’re relatively sticky. So I guess ultimately one of the inspirations for the idea of Fundable is these asset classes are a very valuable and should be a tradable asset class a businesses recurring revenue contract. So similarly, I guess to almost like a bond. Why can’t a business be able to trade and sell its future recurring contracts if they’ve got clients that they anticipate or at least we anticipate will be there for that period of time?
[00:02:47] – Peter
Yeah, okay. Great idea. It’s great to see alternative routes of funding for SaaS companies. Obviously we’re streaming live in the SaaS founders Facebook group. So there’s a lot of founders in there, a lot of people interested in methods of funding for their businesses too. So thanks for joining us for a chat on this. Ethan, I was interested in how you came to found Fundable. What was your story leading up to build this business?
[00:03:15] – Ethan
Yeah, I guess Peter it was probably two main sources of inspiration. One being so, in my previous role, I sat on the investment committee looking at early stage investment opportunities. And I vividly remember one afternoon, two founders coming to our offices. They’re looking to raise a relatively significant cheque. However, they’re looking to dilute. It would have been close to 40 or 45% of its business at such an ascent stage. And I’ll think to myself, unfortunately, this business, they aren’t profitable. They don’t have any sort of track records, unfortunately. So they couldn’t take on any sort of bank debt. And I guess it was the all equity model, or unfortunately, it was almost close up shop.
So I thought to myself, there had to be a more founder friendly funding solution for these businesses to be able to scale and thrive. The second source of inspiration came from so I had a personal investment in a SaaS business, and unfortunately, they had to undergo their capital raise sooner than they had budgeted for. But as you can probably appreciate, Peter, is for the majority of these businesses, it’s due to significant development work that must be paid upfront in order for them to scale, to hit that inflection point where they’ve passed through and become profitable.
[00:04:43] – Ethan
And this business, they’ve got contracts with the likes of AXA, Microsoft, Brookfield, these huge conglomerates three, five years out that for the most part, you’d anticipate wouldn’t be going anywhere. So I thought to myself, what if that business could bring forward those payments, extend its runway, increase its revenues, increase the vow, everyone gets less diluted, and everyone’s very happy.
I guess those were the two main sources of inspiration. So one being, I guess, seeing and personally seen from an investor standpoint, from the other side of the table, how these founders had to scale and grow its business. And I knew there had to be a more founder for any solution out there. And then, I guess also being on the other side of the table, being an investor in these companies, I knew there had to be a better way to grow these businesses without getting diluted.
[00:05:38] – Peter
Great. It’s awesome that you come from that investment background. So you’ve been sitting on that side of the table learning to assess investment opportunities in SaaS. And it sounds like you really identified a problem where you could bring something to the market or a method for financing that, as you say, is more founder friendly. I really like that kind of approach, making something that’s more appealing to founders, particularly if they’re in an earlier stage and they don’t want to give up equity, but they do have some recurring revenue. Ethan, can we talk a little bit about why founders I mean, you’ve touched on it just there, but can we talk a little bit more about why founders would choose this route of financing over the other, maybe more conventional means of equity debt or other routes of funding their SaaS business.
[00:06:33] – Ethan
Yeah, of course. Well, I guess to simplify things, you’ve obviously got your debts, generally debts, it is over a three to five year period, the payback and perhaps there might be some sort of repayment terms also back repayment cap in that security. Whereas with us we work on a flexible short term basis so our advances are repaid over a twelve-month cycle. Debt obviously generally will also have personal guarantees, directors guarantees. Perhaps there might also be some form of dilutive instrument like a warrants and covenants involved within the debt structure.
And I guess from an equity standpoint, ultimately everyone wants to maintain their greatest black box almost, which is their greatest upside. I think founders and need to also appreciate on the other side that when they go to reach, when they go to speak to VCs and potential investors, they need to ensure that they feel that those founders are incentivized and motivated to really help that business to grow. And by having and maintaining their equity ownership, it provides a greater level of comfort that they will put all they can into helping that business to grow. There are also other forms of financing such as revenue based financing.
[00:08:01] – Ethan
The key differences between us and revenue based financing is with the revenue based finance, they’ll take security over your entire book and your rate of interest over the month will vary depending on your revenues. For us it’s just a fixed discount based on the annual contracted value. Also with revenue based finances also generally mapped over a longer period, some will require also personal guarantees, directors guarantees and some revenue based finances will also have some form of dilutive instruments attached to the security.
So I guess to simplify things, we are as founder friendly as you can kind of put to the table almost. So obviously non dilutive, no equity involved, we’ve got a fixed cost over a fixed period of time. There’s no requirement for directors guarantees, personal guarantees. We are fast as well. So I guess founders also appreciate that that we can onboard and underwrite a client within the day. Sometimes it’s generally within 48 hours. So founders definitely appreciate that because time is definitely of the essence when you’re in the startup world.
[00:09:21] – Peter
Yeah, great. It’s good to see just a little bit about the differences between these different types of funding as well. One thing that strikes me is that often founders or founding teams are when they’re looking for capital, they’re also seeking sometimes mentorship or access to a greater network and particularly VCs that have invested in similar types of B2B SaaS with the hopes of gleaning some more insight or advice on how to their route to market and their methods for growing and how to scale. Is that something that can also be available to them in the kind of route to market that you do for funding?
[00:10:10] – Ethan
Certainly we position ourselves as very far from a passive capital partner in the sense, I guess, to start off, if a business is looking to raise equity, we’ll introduce them to potential VCs for us, obviously it helps derisk our own advance of the business given that they do have an equity partner. And we definitely appreciate that. There are benefits to particularly getting strategic partners involved and we position ourselves as very much a complementary capital solution to the equity.
So there are benefits in getting your equity raise. However, I guess raise less equity and dilute less, but still get that same amount that you need to grow your business. And then supplementary to obviously the introductions that we make, we have also partnered with the likes of Amazon, Stripe, Aerolex and many other within the ecosystem to help them to help our portfolio companies get other benefits in addition to the Fundabl capital.
[00:11:17] – Peter
Yeah, great. So there’s still means to get kind of strategic partners or mentorship and things like that. What’s also interesting is the combination of maybe doing raising some capital through equity deals and then maybe also through fundable or other means which don’t dilute. So it just means that they’re giving up less equity in that stage. Ethan, I wanted to ask you if you have any examples of B2B SaaS companies that have worked with Fundabl and any success stories there or any experience that you’ve had that really stands out with financing for these companies.
[00:12:03] – Ethan
Well, that’s a very you’ve asked the question at a very interesting time today. We found out that a client that we onboarded last month doubled its revenues in the space of a month, which was just quite remarkable in terms of the benefit from taking up our fundable and ability to bolster distribution efforts and increase its marketing collateral and hire a BDM and scale its tech. So, yeah, that was definitely a success story that came out today. We had a very similar client last month as well that had a similar success story close to doubling its revenue. So yeah, no, we’re a team that is super passionate about helping the start up ecosystem. So hearing some of those success stories yeah, it makes the experience super rewarding.
[00:12:56] – Peter
Yeah. Hey, that’s awesome. Is that growth that they experience directly attributable to getting their funding with fundable or do you find that the companies that go this route are at a point where they’re steadily growing already and they have some reliable recurring revenue or is it a combination?
[00:13:21] – Ethan
Yeah, I definitely can’t attribute it all to the fundable capital. I definitely say that it’s supercharged that growth. Yeah, I guess ultimately most of the businesses that partner with us, they do need that capital kick to be able to bolster those distribution efforts. We’ve onboarded clients that are profitable, have been profitable for years, but they still need a capital kick to be able to really push through that innovation ceiling and be able to whether that be to put out a new product or to launch into a different market or a different sector. And without a form of some form of growth capital, it’s a very slow move to those opportunities. So I guess we support those companies by providing them with a faster, flexible and a cost efficient way for them to be able to do exactly that and harness those growth acceleration opportunities.
[00:14:22] – Peter
Yeah. Fantastic. Hey Ethan, I wanted to ask you, just as we wrap up now, I wanted to ask you what are the ideal kind of B2B SaaS companies that you guys at Fundabl are looking to work with? I know you’re based in Australia, so I wondered if you’re looking at a certain territory or globally and whether it’s just B2B SaaS or something more specific. And as a follow up to that, I wanted to ask you, could you let us know how anyone interested can get more information on what they should do to start their process with Fundabl?
[00:14:58] – Ethan
Yes, of course, Peter. So in regards to your first question, we are particularly targeted towards supporting the SaaS ecosystem within Australia and New Zealand for now. However, that said, ultimately our model can support many other businesses that have a recurring or reoccurring nature to its revenue stream. So we’ve partnered with those in the marketing space, in the legal space, in the educational space, in many other service areas for them to be able to scale and make benefit from our offering.
Some of the criteria that we require is that they do have fifteen K of monthly recurring revenues as well as some form of high growth aspirations. I guess ultimately we back founders and we back them to be able to grow and us hopefully to be able to grow with them. That’s ultimately how our model works and what gets us most excited, how you can reach out to us, hit us up on our website, fundable.com. Shoot me an email. [email protected]. So that’s Ethan. [email protected], I’d love to hear from you and hopefully be able to partner with and support your future success.
[00:16:23] – Peter
Thanks so much for joining us, Ethan. It’s been great to chat, great to learn more about Fundabl and I wish you all the best with your business and your SaaS companies that you partner with in the future.
[00:16:34] – Ethan
Thanks so much, Peter. It’s been an absolute pleasure.
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