Funding Not Secured

I can't fund an acquisition. This post outlines why this hasn't worked, and shares an investment model that I think someone could take up.

I run a company that has been growing over 50% year over year for the last five years, while staying profitable the entire time. As I write this in the second half of 2021, there is an unprecedented level of capital looking for an investment. And yet, I can't find a way to fund an acquisition.

Access to capital is important for all firms, but it's particularly vital for startups and young firms, which often lack a sufficient stream of earnings to increase employment and internally finance capital spending.
- Janet Yelle, United States Secretary of the Treasury

Background

We're considering acquiring a product from another company, not the entire company. It's a profitable software product with an existing customer base that would distract the current owners from their main product offering. This acquisition would:

  • Increase our gross revenues by 20%
  • Gross profits by over 50%
  • Net profits by approximately 80%

The growth numbers are also there to back it up, so it feels like a no-brainer.

We have self funded many similar acquisitions in the past and have a solid understanding of how to make acquisitions successful.

There are four types of capital currently available to me:

  • Term loans
  • Lines of credit
  • Revenue based financing
  • Sale of equity

While none have worked out for us, I know there is a market opportunity for a different kind of lender.

If you know a different model / have a suggestion, give me a shout on Twitter  @NothingEasySite

We don't fit their models

A bad attempt at a ven diagram demonstrating the upcoming commentary
Options vs Challenges

Term Loans

Because we want to buy a product, not a company, it's hard for term loan providers to analyze what we're buying. The difficulty in that analysis results in no interest from most parties. Banks have much more relaxed policies if the buyer earns >40M in annual revenue. Unfortunately, we're not there yet.

Lines of Credit

Our current business is a mix of resale of software made by others, sale of software made ourselves, and services that we provide in this ecosystem. The product were buying is software.  As a result, we don’t have assets that a bank or some other party can use as collateral.

Revenue Based Financing

Revenue based financing companies underwrite based on our current revenue. Lighter Capital and Pipe offered us about 50% of our ARR for the loan size.

Screenshot from the pipe.com signup flow

This is problematic because some of our business lines earn non-recurring revenue. Defining what type of revenue is or is not recurring has been challenging. The recurring part is only 50% of our software sales revenues. The outcome? A capital shortfall. The lending process doesn't value the built-in ARR of the target asset.

Sale of Equity

Equity is a complicated topic because there are so many variables.


Due to how small our free cash flow is, private equity investors are not interested. And since we're not going to grow into a billion dollar company, we're not appealing to the VC crowd either.

The Only Options

In the end, all conversations I have had in this area were with what I would call lenders of last resort. They all wanted a 20%+ APR on the loan, plus 10%+ of the company itself. Ultimately, no one in this area was someone who I would want as a fellow shareholder.

Ideal Future

I would like to see a funding entity that addresses the following market:

  • Between one to 20 million in gross revenues
  • High rate of growth >30% YoY for 3+ years
  • Existing revenues are a mix of services and software sales

And can offer terms along the lines of:

  • Usage of funds should impact loan size and term
  • Can underwrite from a finance rather than an accounting perspective
  • Can value IP and treat it in the scope of assets of the borrower and their intended acquisition target
  • Offer an APR somewhere between a traditional bank loan and a credit card

My hope is someone can tell me (@NothingEasySite) I am fool and have overlooked some option designed exactly for this.

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Jamie Larson
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