Is debt financing the new venture round for fintechs? – TechCrunch

Welcome to The Interchange! If you received this in your inbox, thank you for signing up and your declaration of confidence. If you are reading this as a post on our site, please register here so that you can receive it directly in the future. Each week I’ll take a look at the hottest fintech news from the previous week. This will include everything from funding rounds to trends to an analysis of a particular space to hot takes on a particular company or phenomenon. There’s a lot of fintech news out there, and it’s my job to stay on top of it—and make sense of it—so you can stay up to date. — Mary Ann

More debt financing means flat is the new up

Last week I wrote about Founder’s pathan Austin-based company that provides debt financing to B2B startups.

When I started thinking about debt and credit facilities as increasingly attractive options for startups seeking capital – especially during a downturn like the one we’re currently experiencing – I realized that the number of companies securing debt capital or credit facilities seemed to be on the rise. This can be for a number of reasons. Some founders may struggle to raise venture dollars, while others won’t – preferring not to dilute their ownership.

On August 8, Mexico City-based expense management started Clara announced that it had been approved for financing from Goldman Sachs for up to $150 million. The facility, it said, would allow Clara to continue expanding its corporate card, accounts payable and short-term financing offerings for companies in LatAm. The company says it is currently working with over 5,000 businesses across Mexico, Brazil and Colombia with ambitions to double that number by the end of the year. Notably, Clara was believed to be valued at around $130 million at the time of a $30 million raise in May 2021. Just eight months later, it had raised a Coatue-led Series B of $70 million and achieved unicorn status.

Here in the US, Yield street announced on August 11 that it had secured a $400 million warehouse facility from Monroe Capital LLC. A spokesperson from the alternative investment startup told me the funding is the largest of its kind to date for Yieldstreet. In June 2021, I covered Yieldstreet’s $100 million Series C with “near unicorn” status. In announcing its latest funding, the company said it has had more than 400,000 users since its inception in 2015 and more than $3 billion in funding across an ever-evolving suite of investment products. The spokesperson also told me: “This is not normal corporate debt – it uses a warehouse facility, meaning it is targeted to support the creation of new funds and products for Yieldstreet’s platform – increasing the number of investments available to users, rather than general operations or expenses .”

A quick note on the difference between warehouse facilities and debt financing – debt is borrowed capital for operational reasons. Warehouse facilities are essentially a line of credit. (Thanks to TC+ editor and resident financial expert Alex Wilhelm to the lesson.)

Healy Jones, VP of FP&A at Kruze Consulting, noticed my last tweet about seeing a lot of debt financing and shared the following via email:

“Many reasons why this is happening, but a big one is that the drop in equity valuations is driving entrepreneurs to find less dilutive ways to expand their runway in hopes that they can grow to at least a flat round.”

Kruze COO Scott Orn, who used to be a partner at a venture debt fund, added his own thoughts via email:

• You need to plan ahead for risky debt. Put it in place relatively soon after an equity financing. That way, there is no unwanted choice for the lenders; everyone (founders, VCs and lenders) around the table is happy at that time. If you’re trying to put something in place with less than six months of cash, you won’t be able to get debt. If you put it in place after a share round, you can draw it down far into the future – it’s called a forward commitment/withdrawal. This gives the start-up many options.
• It is super important to understand all the terms. Often the founders are not aware that there are things like funding MACs, investor break clauses, etc. These terms can be used by the lender to block the startup from either drawing down the money or creating a default after the money is drawn. In any case, the company is in trouble and cannot count on the capital. So you really need to know your lender, get the VCs to know your lender and pay attention to your terms. This is why we created the Sample Venture Debt Term Sheet, to explain all the terms.
• Don’t borrow your own money. Often, lenders will structure an agreement with many covenants, including minimum cash requirements. For example, they will lend you $4 million if you have $2 million in the bank at any given time. In that case, you really only get $2 million in new capital. Furthermore, the threat of an investor abandonment or MAC clause can prevent you from actually spending the money as well.
• While startup interest in venture debt is increasing, lenders are becoming more conservative. Across the board, startups are asking us about venture debt much more often. At the same time, when I talk to the lenders, they are reducing the dollar size of new commitments, reducing grace periods, asking for more warrants, and being much more selective about which startups to lend capital to.

On my side, I know about at least two other fintechs plan to announce debt lifting and/or credit facilities in the coming weeks. So this definitely feels like a trend.

For other TC coverage on this topic, go here and here.

Searchlight on Africa

August 10, TC’s man on the ground in Nigeria, Take Kene-Okaforwrote about fintech Team Apt raising over $50 million in a funding round led by US-based QED investors. As Tage wrote: “In a move rarely made by Western VCs, QED announced the hiring of Gbenga Ajayi and Chidinma “Chid” Iwueke to lead its investments in Africa in January. Nigel Morris, the firm’s co-founder and managing partner, said in an interview with TechCrunch that Africa was the final piece of the puzzle to transform QED into a global fintech specialist VC firm.

I thought this was so interesting, I asked Tage if he could elaborate on the meaning of this news. Below are his thoughts:

The most funded and well-known fintechs in Africa have western elements in their operations: payment gateways, cross-border and digital banking games. TeamApt, with its agency banking business, is one of the few fintechs outside of this category.

Here is a summary of the business. Nigeria has an average of 4.8 bank branches and 19 ATMs per 100,000 adults, compared to the world average of 13 bank branches and 40 ATMs. Reports also say that less than a third of Nigerian adults have access to a bank branch or ATM within one kilometer of where they live. This challenge of accessing financial services, especially for the unbanked and underbanked, has given rise to agency banking, a branchless banking model that extends financial services to the last mile via a network of agents and POS machines.

It is a local solution that foreign investors may not be familiar with. Square is the closest equivalent in the US in terms of merchant engagement and a sales angle. But that doesn’t quite capture the complete picture. Therefore, it is not surprising to see that investments flowing into the space have primarily come from homegrown or Africa-focused investors (Chinese-backed OPay being an exception).

So QED Investor’s first Africa involvement in TeamApt comes as a big win for the agency’s banking business and the local tech scene in general. Why? Because the deal wouldn’t have happened if QED didn’t take the bold step of hiring local expertise that understands the market.

Western VCs have dedicated funds and established local offices in emerging markets such as Latin America and Southeast Asia, but they remain hesitant to do the same for Africa. For them, it’s practical for now to test the market by throwing a few million dollars into a handful of startups and seeing how they pan out. It’s a perfectly fine strategy; However, with the current market downturn, most of these firms will be less inclined to continue as they concentrate on their core markets. So thumbs up to QED, again, for being bullish anyway.

And if you don’t already, follow Tage’s work! He’s awesome. For more on Africa’s venture scene, go here.

Weekly news

From TCs Lauren Forristall: “Amazon‘s ‘One’ palm scanner payment technology will be launched in over 65 Whole Foods stores in California. This is the largest rollout to date, with stores in Malibu, Montana Avenue, Santa Monica, Los Angeles, Orange County, Sacramento, the San Francisco Bay Area and Santa Cruz receiving the technology aimed at modernizing retail.” More here.

From TC contributor Vadym Synegin: “Ukrainians have often been pioneers in market-leading companies and built products that positively affect society, especially in the fintech sector. Despite the obstacles of the war, the Ukrainian fintech community is working to create better infrastructure and regulation for the country, which can attract valuable companies and institutional investors from various backgrounds.” Read “5 reasons why Ukraine’s fintech sector is growing despite war” here.

Start-up of real estate technology Back home, which in May 2021 raised $136 million in a Series B funding round led by Norwest Venture Partners at a value “just north of $800 million” and secured $235 million in debt, has laid off 20% of its workforce. Report Real Trends: “‘Buy before you sell’ firm Homeward has laid off about 20% of its workforce, according to a letter from CEO Tim Heyl to employees … Despite posting what Heyl calls the firm’s “strongest month ever” in May and solid second-quarter results, “Heyl said the market shift was more sudden than expected, forcing the company to make cuts.” At the time of the May 2021 increase, the company had 203 employees, so based on that, Homeward could potentially let go around 40 people.

Financing and M&A

See TechCrunch

Real workwhich helps lenders verify borrowers’ income and employment, raises $50 million

Longera wealth technology firm, is banking $15 million in Series A when its valuation reaches $50 million

Phoenix raises $30M as fintech spotlight picks its sides. The startup announced earlier this year that it was becoming a payments facilitator, as well as enabling other companies to facilitate payments. The move puts it in direct competition with Stripe.

And other places

DD360 receives $91 million to grow its proptech and fintech offering in Mexico

Modern life bags $15 million to support insurance advisors

Financial Venture Studio (FVS) closes $40 million Fund II – A spokesperson told me via email that “the fund continues to outperform Fund I is up 4x.” In February, TechCrunch reported that FVS had named Cameron Peake, a former startup founder and advisor, as its newest partner.

Food stamp-focused For raises $22M — TechCrunch covered first fodder emerging from stealth in March.

Well, that’s it for this week. I don’t know about you, but it feels like this summer just flew by. I’m not ready for it to end… Until next time, xoxoxo Mary Ann