Heading home from my first in-person SaaStr event in the San Francisco Bay Area this week, I was struck by a trend that continues to gain momentum in the software startup community – founders’ reflexive aversion to venture equity funding, and instead, a growing affinity for debt, whether venture, bridge, credit line, revenue based or asset backed loan. The reasons behind this trend are somewhat academic, as thoughtfully reported in this Bloomberg article from Monday. But the main reason is 15 years of cheap-money-induced asset valuations crashing back to earth. This year’s abrupt and precipitous fall in equity prices, both public and private, is forcing ‘down rounds’ on early stage equity investors, and growing the divide in valuation expectations between later stage, private equity funds and target portfolio companies.
But there’s nuance to this debt-over-equity trend that’s driving its appeal to SaaS founders, and it’s not academic at all. In fact, it’s almost religious. The SaaS founders I met with are true believers. They have faith in their products, and there’s no way they’re going to ‘sell short’ to an equity investor proffering (what they perceive to be) an unworthy valuation – an unworthy valuation that signals a lack of faith in that founder’s product and vision.
Having just bore-witness to many of these startups and their respective technologies, I can testify that more than a few are legitimate, next-generation commercial solutions, including software for telecom billing, cryptographic data security, enterprise-level inferential AI, social commerce, and conversational commerce. And with the right, non-equity based financial backing, many of these founders are well on their way to leveling-up in the next two-to-four years.
And this gets us to this week’s most interesting. This ‘unholy’ union between debt investors and SaaS startup founders offers an ironic twist of fate, in that, unlike their equity peers, debt investors don’t have to have faith in the vision, product, or service of the founder or startup – their primary concern is getting their money back with interest. Debt funds operate on cash flow projections, collateral, and credit risk. And that’s okay, because although these ‘faithful’ founders and ‘faithless’ debt funds make for an unholy union, their mutually beneficial relationship has the potential for a heavenly growth trajectory.