There are more alternative financing methods now than ever before as founders look for options outside of raising venture capital to grow their companies.
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In recognition of that, Scaleworks, a San Antonio-based firm that offers a non-traditional form of capital and debt for B2B SaaS companies, announced this afternoon that it’s spinning out its debt fund as its own entity.
Dubbed Element SaaS Finance, the new entity has tapped John Gallagher to serve as its CEO. Since launching its $10 million Debt Fund in January 2018, the fund has done over a dozen deals. Buoyed by that success, Scaleworks decided to break out the fund.
Interestingly, Gallagher (who served as Scaleworks’ director of finance) told me the firm is not looking to raise more money for the debt fund at this time and is instead using the money it gets repaid to do more loans.
“Maybe sometime in the near future, we’ll raise another fund,” he said.
Debt vs VC
Debt financing is popular among founders who might have a “clear growth path” but who don’t need “huge amounts of money” to work on it, Gallagher told me.
“A lot of companies find this a great way to grow and keep control while increasing their value,” he added. “We don’t require board seats, don’t ask them to give up equity, and we don’t tell them how to run their business.”
Element SaaS Finance lends to companies doing at least $1 million in recurring revenue, with customers and a proven market for their product.
“SaaS companies should have high gross margins. So, burning a little bit of cash to grow is ok,” Gallagher said.
Thus far, the debt fund has completed 16 loans, averaging nearly $1 million. (Some of which have already been repaid.) Loan sizes range from $200,000 to $3 million.
“People like the fact we are operators of SaaS companies and speak the same language,” Gallagher said. “We understand how their revenues work, what they need and what stage they’re at.”
Element’s main product, which is a term loan, can be flexed to be taken in different ways. For example, say a company needs a loan of $1 million but Element agrees to a schedule of drawdowns that works for the company over time. Or a company might only need $275,000 in short-term cash, which they can repay quickly and then use a debt facility as needed.
The fund has also inked a new partnership with a bank in San Antonio, TransPecos Banks, to provide banking solutions for SaaS companies.
Illustration: Li-Anne Dias