Do you have ARR? Founderpath wants to help you grow with ‘founder-friendly’ debt financing – businesskinda.com

In this challenging fundraising environment, more startups than ever are opting for alternative financial solutions such as: debt.

Despite the negative connotation that comes with debt, a startup shouldn’t see it as an act of desperation during a recession, as businesskinda.com’s Kyle Wiggers and Alex Wilhelm recently pointed out.

In particular, companies with high recurring revenues and insight into future performance, such as SaaS startups, can benefit from debt financing, Alex emphasizes.

Enter founding path. The Austin-based company recently raised $145 million in its own debt and equity financing to help B2B SaaS founders grow their businesses without diluting ownership. Founder Nathan Latka experienced firsthand the painful process of giving up too large an interest in a startup he founded years ago — an experience, he says, eventually led him to start Founderpath.

With the market shifting dramatically in recent months, Latka says Founderpath has seen more demand than ever in recent months.

According to Latka, since its launch in January 2020, the company has committed more than $60 million in capital to 130 SaaS founders. In the past 12 months alone, the company has wagered $50 million, with more than half of that taking place in the past four months.

So, how does it work? Founderpath claims it allows founders to cash in up to 50% of their annual recurring revenue (ARR) upfront. It asks the companies to link every subscription system they use to their own platform. Once Founderpath understands a startup’s finances, the company can receive an offer “in less than 2 to 3 minutes,” Latka says.

Founderpath is aimed at bootstrapped SaaS companies that earn at least $10,000 in monthly recurring revenue (MRR), with the typical company profile doing between $1 million and $5 million in ARR.

Now, Founderpath isn’t the first (or last) company looking to help SaaS businesses with non-dilutive financing. It competes directly with Pipe – a marketplace that connects businesses with predictable, recurring revenue for investors that was valued at $2 billion last year — and Capchase, which will be released in July 2021 insured of $280 million in new debt and equity financing.

How Founderpath differs from others in the increasingly crowded space lies in the conditions, Latka believes. For example, he says Founderpath offers founders a whopping 12 to 48 months to repay their debt, no early repayment penalties, and no warrants. Typical terms are $500,000 repaid over 24 months at a discount rate of 7-12%, according to Latka. Competitors typically offer less time for payback and higher rates, he said.

“There are no other fees and the money is transferred overnight,” Latka told businesskinda.com.

As mentioned above, the CEO is eager to help founders not make the same mistakes as a young entrepreneur. After starting his own SaaS company as a 19-year-old student at Virginia Tech, Latka thought he was “on top of the world.”

“L started it up to get a million dollars in ARR,” he recalls.

Then Latka received a cold email from some VCs, eventually raising $2 million against a post-money valuation of $10.5 million in 2014.

“I got really watered down and sold the company in 2015,” he said. “It was a terrible sale – for less than 1x ARR. I owned less than 40% of the business on a fully diluted basis.”

That same year, Latka launched a podcast and has interviewed a SaaS founder almost daily since — so far, 2,500 episodes have been recorded that have had 18 million downloads, he said.

Every so often, when he stopped recording, a number of founders would talk to Latka about the possibility of getting into debt. It opened up a new world for Latka, who said he “quickly realized that debt was the secret to keeping control of your SaaS business, getting capital fast, and avoiding VC dilution.”

When he began helping founders negotiate debt, Latka concluded that many of the terms in debt financing were not founder-friendly and included things like huge prepayment penalties, 1 to 2% warrants, equity kickers, and “repayment limits that limit the really hard to figure out what the real interest was.”

Other things these contracts include? Legal fees and covenants that founders could take money, but that they had to keep a certain amount of cash in their bank — “dead money” that Latka said couldn’t be used to grow the business.

So in 2018, he started using his own money to write debt checks in SaaS companies. He found that it was “really hard to keep track of all those debt investments” without software, so he built a tool that he says gives founders a way to link their subscription billing account to his platform.

“If you run a SaaS business and you have 100 customers paying $50 a month,” Latka needed a way to look at that, he told businesskinda.com. “To make sure I was comfortable entering into a debt agreement, I needed to understand who your customers were and what your income was, so I knew what I was lending against. This allowed me to track these deals more closely and make faster and more accurate offers to founders for new debt.”

By 2020, he had officially established Founderpath to formalize his lending. Today, the company only has eight employees – a fact Latka is proud of and says it has operated in a capital efficient manner. So efficient that it turned profitable last year, he said. And that podcast? It serves as a fantastic distribution channel.

“We’ve been growing revenue by 10% to 20% every month for the past six months,” he said. “Based on our growth over the past 30 days, we will be deploying $100 million this year and $1 billion in the next 24 to 36 months.”

With today’s changing environment, Founderpath has branched out not only to help bootstrap founders, but also those Latka describes as “capital efficient SaaS founders who raised less than their ARR and were looking for bridging rounds.”

“We’re talking about CAC (customer acquisition cost), customer churn, average revenue per customer, customer lifetime value,” Latka said. “We only target B2B SaaS founders because we need proof that they can repay us as we don’t take equity.”

In raising its own funding, Founderpath turned to Forbright Bank, with $8 billion in assets under management, to lead the $135 million debt deal, and Singh Capital Partners (SCP) to lead the $10 million equity financing. Other donors include the founders of companies such as ZoomInfo, Brandwatch, Truebill and Par Tech. In total, the company has raised $15 million in equity.

SCP, he said, is a multifamily office with more than 800 LPs who are SaaS managers of public companies, current or exiting founders and family offices.

Nicholas Ricciardella, an associate at SCP, said some of the company has a number of LPs that: manage public market portfolios and saw public SaaS multiples compressed in real time months before they started appearing in private markets and VC.

“Using that feedback, we made price corrections much earlier compared to our peers and often became the vanguard of bad news when giving founders terms that would now be considered ‘market’,” he wrote via email . “With all the pushback we were getting from founders coupled with the slow grind of lower valuations as more and more VCs began to align their underwriting with public market valuations, we realized that non-dilutive financing options would take off since they were launched. Allowing SaaS founders an escape from having to fund their companies at lower valuations (i.e. more dilution) than previously expected.”

He described Founderpath’s adoption as “superior” and said SCP was also impressed with the company’s capital efficiency and customer acquisition strategy.

San Antonio, Texas-based Active Capital, which led Founderpath’s $5 million starting round in October 2021, was fitting support. Founder and CEO Pat Matthews told businesskinda.com that he has known Latka for over a decade and even invested in his first startup.

“That company wasn’t doing very well… but even in a time of need and hardship, I was only more impressed by Nathan’s character and unique talents,” he said.

In addition, Matthews himself spent the first half of his career as a bootstrapped SaaS founder. (He previously founded Webmail) leave for Rackspace).

“While I now run a venture capital firm, I believe the future of small businesses will be tens of thousands of hardworking, bootstrapped SaaS founders who will never want or need VC,” he told businesskinda.com. “Founderpath is creating a whole new funding path for these types of companies and the company’s focus on bootstrapped SaaS founders allows them to tailor the right kind of financial instruments and capital products for these types of companies. I think Founderpath is a great example of vertical fintech for a fast-growing sector of the world.”