Are debt financings the new venture round for fintechs startups?
Welcome to The Interchange! If you received this in your inbox, thank you for signing up and your vote of confidence. If you’re reading this as a post on our site, sign up here so you can receive it directly in the future. Every week, I’ll take a look at the hottest fintech news of the previous week. This will include everything from funding rounds to trends to an analysis of a particular space to hot takes on a particular company or phenomenon. There’s a lot of fintech news out there and it’s my job to stay on top of it — and make sense of it — so you can stay in the know. — Mary Ann
More debt financings means flat is the new up
Last week, I wrote about Founderpath, an Austin-based company that offers debt financing to B2B startups.
As I started thinking about debt and credit facilities as increasingly attractive alternatives for startups who are seeking capital — especially during a downturn such as the one we are currently experiencing — I realized that the number of companies that were securing debt capital or credit facilities appeared to be on the rise. This could be for any number of reasons. Some founders might be struggling to raise venture dollars, while others don’t want to — preferring not to dilute ownership.
On August 8, Mexico City–based expense management startup Clara announced it had been approved for financing from Goldman Sachs for up to $150 million. The facility, it said, would allow Clara to continue to grow its corporate card, accounts payables and short-term financing offerings for businesses in LatAm. The company says it’s currently working with over 5,000 businesses across Mexico, Brazil and Colombia with ambitions to double that number by year’s end. Notably, Clara was believed to be valued at about $130 million at the time of a $30 million raise in May of 2021. Just eight months later, it had raised a Coatue-led $70 million Series B and achieved unicorn status.
Here in the U.S., Yieldstreet announced on August 11 that it had secured a $400 million warehouse facility from Monroe Capital LLC. A spokesperson from the alternative investment startup told me that the financing is the largest of its kind to date for Yieldstreet. In June of 2021, I covered Yieldstreet’s $100 million Series C at “near unicorn” status. In announcing its latest financing, the company said it has had more than 400,000 users since its 2015 inception and more than $3 billion in funding across an ever-evolving suite of investment products. The spokesperson also told me: “This isn’t normal corporate debt — it uses a warehouse facility, which means it is targeted to support the creation of new funds and products for Yieldstreet’s platform — growing the number of available investments for users, rather than general ops or expenses.”
A quick note about the difference between warehouse facilities and debt financings — debt is lending capital for operating reasons. Warehouse facilities are essentially a line of credit. (Thanks to TC+ editor and resident finance expert Alex Wilhelm for the lesson.)
“Lots of reasons this is happening, but a big one is the drop in equity valuations is driving founders to find less dilutive ways to extend runway in the hopes that they can grow into at least a flat round.”
Kruze COO Scott Orn, who used to be a partner at a venture debt fund, added his own thoughts via email:
You have to plan ahead for venture debt. Put it in place relatively soon after an equity financing. That way there is no adverse selection for the lenders; everyone (founders, VCs and lenders) around the table is happy at that time. If you try to put something in place with less than six months of cash, you will not be able to get debt. If you put it in place after an equity round, you can draw it down way into the future — that’s called a forward commitment/drawdown. That gives the startup a lot of optionality.
It’s super important to understand all the terms. Often, founders don’t realize there are things like funding MACs, investor abandonment clauses, etc. These terms can be used by the lender to block the startup from either drawing down the money or creating a default after the money has been drawn. Either way, the company is in trouble and can’t count on the capital. So you really need to know your lender, have your VCs know your lender and pay attention to your terms. This is why we created the Sample Venture Debt Term Sheet, to explain all the terms.
Don’t borrow your own money. Often lenders will structure a deal with a lot of covenants, including minimum cash requirements. For example, they will lend you $4 million if you keep $2 million in the bank at all times. In that case, you’re really only getting $2 million of new capital. Furthermore, the threat of an investor abandonment or MAC clause can keep you from really using the money as well.
While startup interest in venture debt is up a lot, lenders are getting more conservative. Across the board, startups are asking us about venture debt way more often. Simultaneously, when I talk to the lenders, they are reducing the dollar sizes of new commitments, reducing interest-only periods, asking for more warrants and being much more picky about which startups to lend capital to.
On my end, I know of at least two other fintechs planning to announce debt raises and/or credit facilities in coming weeks. So, this definitely feels like a trend.
Spotlight on Africa
On August 10, TC’s man on the ground in Nigeria, Tage Kene-Okafor, wrote about fintech TeamApt raising over $50 million in a funding round led by U.S.-based QED Investors. As Tage wrote: “In a move rarely made by Western VCs, QED announced the hiring of Gbenga Ajayi and Chidinma “Chid” Iwueke to lead its investments in Africa this January. Nigel Morris, the firm’s co-founder and managing partner, in an interview with TechCrunch, said Africa was the final piece of the puzzle for transforming QED into a global fintech-specialist VC firm.”
I thought this was so interesting, I asked Tage if he could elaborate on the significance of this news. Below are his thoughts:
The most funded and well-known fintechs in Africa have western elements in their business: payments gateways, cross-border and digital banking plays. TeamApt, with its agency banking business, is one of the few fintechs outside this category.
Here’s a summary of the business. Nigeria has an average of 4.8 bank branches and 19 ATMs per 100,000 adults, compared to the world average of 13 bank branches and 40 ATMs. Reports also say that less than one-third of Nigerian adults have access to a bank branch or ATM within one kilometer of where they live. This challenge in accessing financial services, especially for the unbanked and underbanked, has given rise to agency banking, a branchless banking model that extends financial services to the last mile via a network of agents and POS machines.
It’s a localized solution that foreign investors might be unfamiliar with. Square is the closest resemblance in the U.S. regarding merchants’ involvement and a point-of-sale angle. But it doesn’t quite capture the complete picture. Therefore it’s not strange to see that investments poured into the space have primarily come from homegrown or Africa-focused investors (Chinese-backed OPay is an exception).
So QED Investors’ first Africa involvement, right off the bat, in TeamApt comes as a big win for the agency banking space and the local tech scene in general. Why? Because the deal wouldn’t have happened if QED didn’t take the bold step of hiring on-the-ground local expertise that understands the market.
Western VCs have dedicated funds and established local offices in emerging markets like Latin America and Southeast Asia, yet they remain hesitant to do the same for Africa. To them, what’s convenient, for now, is testing the market by tossing a few million dollars into a handful of startups and seeing how they pan out. It’s an all right strategy; however, with the current market downturn, most of these firms will be less inclined to continue as they concentrate on their core markets. So thumbs up to QED, again, for being bullish regardless.
From TC’s Lauren Forristal: “Amazon’s ‘One’ palm scanner payment technology will be launching at over 65 Whole Foods stores in California. This is the biggest rollout to date, with stores in Malibu, Montana Avenue, Santa Monica, Los Angeles, Orange County, Sacramento, the San Francisco Bay Area, and Santa Cruz receiving the tech that aims to modernize retail shopping.” More here.
From TC Contributor Vadym Synegin: “Ukrainians have often pioneered market-leading companies and built products that positively impact society, especially in the fintech sector. Despite the hurdles of war, the Ukrainian fintech community is working to create better infrastructure and regulation for the country, which can attract valuable companies and institutional investors from different backgrounds.” Read “5 reasons why Ukraine’s fintech sector is growing despite war” here.
Real estate technology startup Homeward, which in May of 2021 raised $136 million in a Series B funding round led by Norwest Venture Partners at a valuation “just north of $800 million” and secured $235 million in debt, has laid off 20% of its workforce. Reports Real Trends: “‘Buy before you sell’ firm Homeward has laid off roughly 20% of its workforce, according to a letter from CEO Tim Heyl to employees…Despite recording what Heyl calls the firm’s “strongest month ever” in May and solid second quarter results, “Heyl said the market shift was more sudden than anticipated, forcing the firm to make cuts.” At the time of its May 2021 raise, the company had 203 employees, so based on that, Homeward potentially let go of about 40 people.
Fundings and M&A
Seen on TechCrunch
Finix raises $30 million as fintech’s spotlight picks its sides. The startup earlier this year announced that it was becoming a payments facilitator, in addition to enabling other companies to facilitate payments. The move puts it in direct competition with Stripe.
Financial Venture Studio (FVS) closes $40 million Fund II — A spokesperson told me via email that “the fund continues to outperform…Fund I is up 4x.” In February, TechCrunch reported that FVS had named Cameron Peake, a former startup founder and advisor, as its newest partner.
Well, that’s it for this week. I don’t know about you, but it feels like this summer just flew by. I’m not ready for it to end… Until next time, xoxoxo Mary Ann
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