Too small for the company? SEALs and early stage investment firms offer funding, though options are still limited

While there might be romance about priming that long-awaited startup, the fact is that even after all the credit cards have run out, you’ll probably still need the money.

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However, if monthly recurring revenue is only a few thousand dollars, fundraising options may be quite limited.

“There has been a proliferation of different financial products” to help startups, said Tyler Trigasgeneral partner and founder of serious capital. “But it’s only when you see around $50,000 that those start to become accessible.”

The SEALs land

That’s one of the reasons why Earnest Capital began designing what are commonly known as Gain-Sharing Agreements – or SEALs for short – about two years ago (yes, the “L” comes from be added).

A SEAL is like an equity investment, but in which the company has the ability to buy back most of the stake it has sold at any given time. Earnest Capital began blogging about the idea of ​​SEALs in late 2018, and since then, according to Tringas, the company has closed around 30 deals.

In such a deal, a company like Earnest will write a check – around $200,000 on average – to a startup. Typically, the startup has revenue between a few thousand dollars a month and a few million dollars a year, Tringas said. The company can then pay that money back over time at a ratio of 3 to 1, typically, to buy out two-thirds of the stake the company took.

An example would be a company receiving a check for $100,000 from Earnest for a 9% stake. Over time, the company could repay $300,000 and recoup a 6% stake. If the startup decides to raise venture capital, the deal essentially turns into a simple future capital agreement — or a SAFE — and Earnest retains its stake.

The idea behind SEAL is “first check, last check,” Tringas said, because Earnest isn’t looking to invest in successive venture rounds if there are any. Instead, the company is giving startups that don’t have access to debt or revenue-based financing because their revenue is too low a chance to raise meaningful money to do things like hire a salesperson.

“If you’re making less than $50,000 a month and you can only get 1 or 2 times your MRR, it won’t make a big difference,” he said.

Limited options

While the idea of ​​SEALs might sound intriguing, Tringas said he was only really aware of his company making them. He admits that because of their novelty, this type of deal has some unknowns – such as the structure of taxes – which, once determined, could make these deals more attractive to more investment firms.

In the meantime, Tringas sees limited options for startups with nascent recurring revenue numbers. Even though VC debt, SAFEs, MRRs, and revenue have all garnered more attention, these options may not help early-stage startups.

Although he remains optimistic with new non-dilutive financing vehicles – such as debt, SAFEs and MRRs and revenue-based – attracting more attention, as well as companies such as Lighter Capital, Founding journey and Pipe offering alternatives to the business, he sees little opportunity for companies starting up or trying to gain traction in the market.

“I think all of these new things are making people take a look,” he said. “But depending on where you are on the scale, you might not have a lot of options.

Those options became even more limited last week when Indie.vc quietly closed.

Indie.vc’s idea was to invest in young startups not looking for big money – and to explore “the need for funding options that fall between bank loans and blitzscaling”. the company farewell message said.

In the post, Indie.vc said part of its problems involved losing around 80% of its limited partner base – possibly because it was unimpressed with fewer follow-up rounds and fewer follow-ups. markups than more traditional VC financing.

This same problem has no doubt affected others. Tringas said limited partners weigh returns against the opportunity cost of eventually putting that money into a large venture capital fund. This made it difficult to raise funds from many people, as his business relied primarily on individual investors.

“Will LPs do something like this?” he said. “That’s the biggest hurdle.”

Others in the industry also see the lack of sponsorship involvement becoming a problem.

Tiny, an accelerator designed for entry-level SaaS founders, typically issues checks starting at $120,000 for the first founder and $60,000 per additional founder. It looks at companies whose MRR starts at around $500 and receives dividends if founders take more pay beyond the allotted cap. The company does not make SEALs, but rather simpler equity investments – typically taking 10-12% of the company’s capital – in very small and young SaaS startups that may be too small to attract the attention of CV.

“A lot of companies fall into this,” said Tracy Osborn, director and program director at TinySeed. “These are successful companies that are not recognized by VCs. We’re trying to fill that gap with really early investments.

The company is closing its second fund, but with SEC regulations limiting these types of funds to a maximum of 99 accredited investors, it can be difficult to raise tens of millions of dollars without LP participation, he said. she stated.

Growing interest

Despite these issues, TinySeed has invested in about 40 companies since its launch in 2019 and aims to eventually invest in 100 post-launch and post-revenue companies per year, Osborn said.

While she admits that many companies are looking to go the traditional venture capital route, she sees growing interest from entrepreneurs looking for alternatives and ways to retain ownership.

“There’s definitely more information on how to stay in control of your business and more interest,” she added.

However, the question remains whether this interest will translate into more choices for early-career founders.

“Hopefully there are more options,” Tringas said. “The opportunity is huge.”

Drawing: Dom Guzman

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