When I joined my first start-up, building and operating data centres, like any asset class in its early years, it was difficult to finance efficiently. It was perceived as a niche real estate asset class, not well understood, risky, and viewed as vulnerable to technology shifts. I saw it otherwise, it was a business with strong underlying growth, excellent customer credit quality, and high switching costs. Over the 7 years during which I followed the sector and eventually invested in, operated, and exited, we saw the shift of data centres from niche to core pillars of infrastructure investment, the equity cost of capital fall sharply, the form and terms of debt evolve rapidly including the emergence of securitization, and multiples in the sector rise dramatically. All of this underpinned the core value proposition of the business, the quality of recurring revenue business models from quality customers.
We believe enterprise SaaS has many similar characteristics and is going through a similar transition. We are just moving up the technology curve from the physical layer to the application layer. The equity markets have already priced that in, but the capital structure of SaaS companies is still largely dominated by equity only because traditional lenders still prefer tangible assets vs. intangible assets. In data centres, we used initial equity capital to acquire land which helped us in turn acquire customers, and more significant investment to build data centres and operate was financed with lower cost capital.
SaaS is no different, equity capital should be used to build the initial product, achieve product-market fit, acquire your first cohort of customers, and then your cost of capital should fall. Right? Not yet! SaaS companies that have achieved product/market fit often have highly predictable recurring revenues but they do not have access to the cash flows to invest in growth. SaaS companies still largely depend on equity capital to continue to grow their businesses. Equity capital is now available from Seed to IPO for SaaS companies, but it is not the most efficient way to finance growth.
Many will argue for venture debt which has been around for years. Yes, it is lower cost, but it always comes with some form of dilution, either through issuance of warrants, or conversion into equity in future rounds of equity raising.
Enter ARR SQUARED, Asia Pacific’s first platform providing non-dilutive financing by securitizing and trading subscription / recurring revenues.
For SaaS companies, your recurring revenue is a high quality asset. It should be treated like one and you should be able to receive cash against it.
“Software contracts are better than first-lien debt. You realize a company will not pay the interest payment on their first lien until after they pay their software maintenance or subscription fee. We get paid our money first. Who has the better credit? He can’t run his business without our software.”
Robert Smith, Vista Equity Partners
ARR Squared is able to offer an instant cash advance against the full annual value of a SaaS subscription. In other words, we are able to turn your monthly recurring revenue into equivalent annual cash which can be used for growth.
We believe higher cost equity capital should be used for further product development, customer support, and driving customer success. The customer acquisition flywheel should be turned by securitizing recurring revenue from your previous customer cohort.
ARR Squared is not here to replace venture capital, but is an alternative way to finance growth for recurring revenue companies, which actually preserves value for founders and early stage investors.
Come and speak with us, we are here to help SaaS founders fuel their growth without debt and dilution.
CEO & Co-Founder