Scaleworks Raises Larger, $80M Fund II To Pursue Its ‘Venture Equity’ Model

Morning Markets: Non-traditional venture capital and alternative startup investment strategies are booming. Here’s a quick look at one such effort.

Scaleworks, a San Antonio-based company that deals financially with SaaS businesses, announced its second fund this week. The new capital pool, dubbed “Fund II,” totals $80 million. That’s $20 million larger than its first $60 million fund, which closed two years ago this month.

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Another day, another fund? Not in this case. What makes Scaleworks interesting is that it’s not merely another generic SaaS-focused venture effort. Instead, Scaleworks makes two types of transactions that you don’t often see from venture capitalists: Purchases and venture loans.

The latter is an effort to lend growing SaaS businesses ($1 million ARR in a B2B market, strong margins, low churn, growth, paid back over 12 to 60 months, per the Scaleworks website) as much as six times their current monthly recurring revenue. It’s simpler to think of the loan as up to half your current ARR that you then pay back from future revenue.

But today’s news has more to do with Scalework’s other business, what it calls “venture equity.” In short, Scaleworks buys SaaS companies with between $4 million and $10 million in ARR and then works to grow and (I presume) exit the companies it picks up. In a Medium post from 2016, Scaleworks general partner Ed Byrne summarized the thesis as follows:

“The elevator pitch is ‘to acquire proven software businesses that have significant growth potential, sustainable over time’.”

With its first $60 million fund, Scaleworks detailed this week that it bought eight companies which collectively grew 52 percent to $80 million in revenue in 2018. With its fresh $80 million, the firm is aiming at larger deals than before, according to a Scaleworks spokesperson (the $4 million ARR floor).

Of those eight, two Scaleworks companies exited last year (FollowUp, and Assembla).

Thinking generally about the Scaleworks model, it likely alleviates some pressure for business-focused SaaS companies to spend on inefficient growth; it’s not hard to find examples of SaaS companies today still plowing cash into sales at alarming magic numbers. But the Scaleworks model, I’d imagine, allows for slightly less-frantic growth pressures and leaner operating costs (centralization can have perks), a combination that could generate healthier SaaS businesses.

Which could be easier to exit to larger companies looking to buy tech or revenue, both of which are cheaper upfront and long-tail than purchasing future growth.

Normally at this point in a story, I’d note that the global economy feels fragile, SaaS revenue is historically expensive at the moment, and more. But, I keep shouting about the same risks and looking silly when the markets go up again. So, who knows, perhaps the expansion will continue! For Scaleworks and its new fund, that would be more than welcome.

Top Image Credit: Li-Anne Dias.

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