Closing the Funding Gap in the Swiss Tech Industry
The life of most asset-light tech companies goes through the same different stages, from its foundation until its maturity. For each of these stages, everyone acknowledges that there is the right executive, the right customers, the right marketing, the right GTM, etc. But what happens with the right capital?
When it comes to the sources of funds, almost all Swiss Tech companies are funded all the way down exclusively via equity, with very few exceptional ones remaining bootstrapped or having access to specific schemes such as grants. Why? It was the only available capital (spoiler alert: until recently).
Simplified development stages of a Tech Company
The Development Phase
During the early stages, funds are needed for research, product development and to pay the minimum founders’ bills until they get the idea and MVP right. After the initial product is ready, the company will need to secure the first paying customers, find the right go-to-market motions and partners, make key hires, refine the product, and if needed, pivot and start the process again as more than 50% of companies do!.
At this stage, there are high risks that a company won’t succeed. Founders could have misinterpreted the pain points, targeted the wrong audience or problem, failed to develop the right product, or followed a wrong go-to-market strategy, just to name a few reasons. Given the high risk at this stage, equity investors are the only external source of capital available, and is great to have so many equity investors in Switzerland.
To compensate for the risk taken, equity investors will require (i) control via a seat on the board of directors and (ii) preferential ownership of your company (around 20% per round). When a company raises equity, the founders’ ownership decreases, creating the so-called dilution for the founders, the team, and any other shareholder. In case the company becomes successful, this will be the most expensive capital by far. But to be fair, without this capital, it becomes much more challenging to build up a company, although great bootstrapped companies examples exist, such as Mailchimp, GoPro, Zoho, Basecamp, and Lynda.
Once a company reaches Producut-Market-Fit (PMF), defines its core market, implements the right metrics, identifies a repeatable sales process, and builds a base of loyal customers, the company can focus on efficiency and growth acceleration. It is critical that the company moves into the scale-up phase only after the previous milestones have been reached since otherwise, it will only accelerate problems. We have seen many companies going down this path as a consequence of the cheap money available in the market during the last few years, and many won’t make it.
The Growth Phase
Post-PMF companies in their growth phase have a diversified client base and a solid understanding of their company’s metrics. On the sales side, they have a high level of confidence about the impact sales and marketing expenses will have on revenues.
An easy way to understand sales efficiency is by taking a look at the customer Lifetime Value (LTV) and Customer Acquisition Costs (CAC) ratio. If the LTV/CAC ratio is lower than 1, then it means the company is destroying value, whereas if it is higher than 1, is creating value. As a rule of thumb, Tech companies aim for LTV/CAC ratios higher than 3. Since many Tech firms have high gross margins (revenues - cost of goods sold), adding a new customer will create a significant positive future impact on the bottom line. This annuity generated justifies an upfront investment to acquire clients that will deliver the so-called annuity.
When a company has this healthy level of sales efficiency and aims for growth, it understands that it first needs to burn cash (CAC) in order to later obtain the rewards (LTV). This only makes sense when the customer acquisition is really efficient and repeatable, ultimately generating profits. The faster the growth rate and longer customer lifetime, the higher the current burn. Companies in this situation are unprofitable (by choice) today in order to be profitable and bigger in the future.
How to Finance Growth ?
In order to fund this growth, Tech companies require external capital. Since many growing Tech companies are cash flow negative, they are still outside of the bankable world. Sometimes, bank loans are available, but they lack long-term commitment, come with rigid terms, and are small in size, not really adding value to the need. This is even more accentuated in B2B companies, where sales cycles and the respective customer lifetime are way longer than in B2C companies. Unless a loan is committed for the long term, it won’t help to finance growth.
Therefore, until now, equity has been the main route. At this stage, the initial start-up risks are mitigated, so equity investors will accept a higher valuation for the next funding round, but still create an additional ~20% dilution for everyone, get preference on future distributions, set new legal terms, and appoint an additional person to the board of directors. And because the last lavishly years created unrealistic valuations, many companies will find out that even flat rounds might not work.
So unless a company is on a trajectory to become a global segment leader and needs to open offices in 20 locations or fund extensive R&D, we believe there is a better way to finance growth for Swiss Tech companies. That is why we created Lendity Growth, our solution to fill this funding gap.
Lendity Growth: non-dilutive , flexible , and long-term loans for Swiss Tech Companies
Use Cases of Lendity Growth
- Extend runway: Get extra funds to hit your planned KPIs and decide your next capital strategy.
- Bridge the gap to profitability: Execute your plans to become profitable.
- Accelerate growth: Increase sales & marketing, enter a new market, or launch a new product.
- Seize an M&A opportunity: Grow by acquiring a complementing or competing business.
Benefits of Lendity Growth
- Fully non-dilutive: No equity kickers or equity options granted.
- Low cost: Typically, the lowest cost of capital and tax-deductible.
- Committed Long term: Up to 5 years committed term to allow for growth initiatives and be resilient to situation changes. No risky clauses that allow the lender to call the facility on any month.
- Flexible drawdown: multi-tranche draw facilities to optimize for capital use.
- Flexible payback: term loans or revenue-based, structured to match the needs of the company.
- Keep control: no new board members, no new shareholders, and no need to change the shareholder’s agreement.
- No valuation change: avoid the draining discussions in valuation changes and priced-round.
- Scalable: The facility is typically increased in size upon further growth.
- Aligned: Aligned with your strategy and goals, exit is not needed.
- Optionality: Allows future funding flexibility, either new debt or equity.
- Fast: less than 4 weeks from the get-go to funding.
- Swiss-made: a Swiss partner, under Swiss law for the Swiss market.
Who is Lendity Growth for?
- Tech-enabled business based in Switzerland
- Recurrent/repeatable revenues of at least CHF 1 M per year
- Growth momentum with low churn
- Healthy margins and positive unit economics
- Not overindebted
- Client diversification
- Efficient capital use
How Apiax secured non-dilutive, long-term, and flexible growth financing with Lendity.