Lighter Capital CEO BJ Lackland and Sean Jacobson, Venture Partner at Emergence Capital, recently teamed up to give their insights and perspective on Funding Options for Salesforce Partners. Both BJ and Sean have more than 15 years working in, raising funds for, or investing in cloud businesses and technology companies. Both have invested in Salesforce ISVs. Lighter Capital has done 10 financings and is currently averaging one per month while Emergence has invested in 3 Salesforce Partners, as well as Salesforce itself. Given that level of familiarity with the AppExchange, what do they think are the most effective funding options for ISVs?
The webinar covered what ISVs should consider when thinking about different capital-raising strategies, then dived deep into two of the most relevant funding options: venture capital and revenue-based financing.
Here’s a quick overview of some of the main points and highlights.
What funding option is right for you?
BJ provided an overview of the various funding options available to Salesforce ISVs from pre-revenue to more established business. He emphasized making sure you know what your funding storyline is for your business as this will drive the funding choices you make. There are a few different routes to consider.
If you are looking to build a company that has $10-$15m in sales and you want to retain more than 80% control, it makes sense to get as little outside funding as possible and explore debt options.
If you are looking to remake a market and need millions to scale then the venture capital route is going to be the only route to get you the firepower you need.
Make sure you know up front what makes most sense for your business and your goals.
More on Venture Capital
Sean took a deeper look at what it takes to attract venture capital. He walked listeners through how Emergence filters from a list of 1200 well qualified investment leads down through the 500 they will meet within a year, through the 50 that make it to due diligence and the final 10 actual investments.
He highlighted a few of the key things they look for when assessing different investment opportunities.
The quality of the founder and their ability to attract the best teams.
Product-market fit. The product or service must “solve a problem outside of Silicon Valley.” There must be a robust customer base beyond friends and family.
A well-articulated plan that sets out how the business goals will be achieved over the next 2 to 3 quarters. Many can define how they will get to $50m in 5 years but Emergence is more interested in current momentum.
Good customer (and prospect) references. These help Emergence understand how critical the product is to the customer’s business.
Low customer churn and efficient customer acquisition though leveraging referrals or a strong channel or freemium model.
If the service is vertical-focused, the potential of at least a 50% market share. For those with a cross vertical (horizontal) strategy, Emergence looks for a potential market share of 10%.
More on revenue-based financing
BJ spent some time explaining Lighter Capital’s revenue-based financing and what kind of Salesforce companies are best suited to this form of financing. Revenue-based financing provides non-dilutive funding that gives you the boost capital you need to grow. Lighter Capital’s interests are aligned with yours in a way that traditional debt isn’t— Lighter’s performance depends on that of the company, so it’s in our best interest to help you ramp up revenues.
BJ covered the key features of a RevenueLoan, which include:
No set interest rates
Monthly payments are a fixed percentage of net cash receipts
The loan matures in 5 years or whenever the cumulative payment reaches a set amount—usually 1.4 to 1.8 times the principal
He then went through Lighter Capital’s qualification requirements for a RevenueLoan:
Minimum monthly revenue of $15,000 and gross margins of 50% or more.
You don’t need to be profitable just yet but you need a clear path to it from use of the funds borrowed — most clients use them for sales and marketing or development.
Not too much other debt.
Quality, recurring revenue streams, repeat customers, and no major customer concentration.
Lighter Capital tries to fund Salesforce ISVs quickly. Our tech-enabled online application often allows companies to get the funding they need in about a month.
BJ and Sean summed up with a comparison of bank debt, revenue-based financing and venture funding and then took some questions.