By now, everyone knows that 2022 has been brutal to the securities markets. The headlines
have been screaming for months about the public markets getting hammered, Venture Capital becoming scarce, valuations significantly down, and the era of “easy money” being gone.
In the start-up world, founders are now told to shift from growth at any cost to preserving cash and focusing on profitability. The message: run your business as if additional equity capital will not be available in the foreseeable future. Yet, many early-stage businesses are built to consume cash as they work to scale their products or service and develop product market fit. Significantly reducing the cash burn may well mean to miss the market, or worse yet, being forced to reduce valuable staff who will be hard to reassemble later, putting a company even further behind the eight ball.
Even companies who are not on the venture path are finding funds harder to come by as banks tighten credit requirements, rates increase, and there’s more competition for non-equity sources of capital.
Angel investors may be faced with the dilemma of providing more cash to their portfolio
companies or accepting down rounds from opportunistic investors.
So, what to do?
First, we should say that it is never a bad thing to take a hard look at one’s business and re-
assess all costs - we would recommend doing that even in a non-down round environment! But if that’s not enough, there is an alternative to trying to sell equity into an unwilling market or convincing a bank to approve a loan in a tightening credit environment. Sage Growth Capital provides non-dilutive capital for growth that is similar to a loan and with lower expected returns than an equity investor. We offer investments of up to 1/3 of previous twelve months’ revenues in exchange for a fixed total return that is repaid through a share of revenue each month.
For example, for a company with around $750,000 of sales over the last year, we might invest
$250,000 in exchange for the right to receive 5% of revenues each month until we have been
paid 2.5X our investment, or $625,000. We generally structure such investments to pay back
over about 48 months.
The cost of our capital is much less expensive compared to selling equity where the equity
investors will expect 10X to 20X their investment at exit. (See our blog post The Cost of Capital: Returns for more on this subject.) When valuations are down, this is especially true. We don’t depend on the founder selling her business in order to be repaid, and working with us includes the added benefits of not having to negotiate valuation nor debate likely exit strategies.
For angel investors, the cost of our capital is reasonable especially when compared to having to support the company with additional cash or accept highly dilutive capital because of the reset in valuations.
Our investment structure aligns well with the goals of the company; namely we do better when sales increase rapidly, as we get our total return faster. It also aligns with the goals of early investors: the company gets the growth capital it needs without further diluting ownership of early investors or founders.
If revenue-based capital might be appropriate for your business or a business in which you are invested, we want to hear from you! The easiest way to start a conversation is to submit our simple application found at www.sagegrowthcapital.com/apply-now.
As a reminder, Sage Growth Capital:
takes no equity;
does not require collateral or personal guarantees;
does require a minimum of 12 months of revenue history;
wants to see revenue streams that are repeatable; and
expects that our capital will be deployed into activities and assets that will grow sales over the life of our investment.
Sage Growth Capital makes revenue-based investments in companies at any stage who need growth capital. It is our mission to provide a more flexible funding option to growing companies who do not fit traditional equity or lending models. To learn more about Sage Growth Capital or to apply for funding visit: www.sagegrowthcapital.com.