Behind the scenes: how non-dilutive capital providers consider whether to fund a start-up

More and more start-up founders are turning to non-dilutive capital (NDC) solutions when fundraising, typically to defer the complexities of raising equity capital or to save themselves hefty dilution.

But while NDC is still somewhat of a new concept, few are familiar with the process and what actually goes into determining whether and on what terms an NDC provider will fund a company.

In this article we share some of the key areas providers are likely to look at, as well as some specific metrics Kashcade focuses on, all of which might ultimately affect terms.

Why collect information at all?

To understand what providers are looking for, it’s important to highlight that NDC typically comes in some form of a loan. A loan is simply where funds are advanced to a borrower, to be paid back over time with a premium.

As such, providers are largely focused on working out the likelihood of a borrower being able to pay back those funds over time.

To do this, historical performance data of an applicant is gathered from various sources and analysed with consideration for the type of business it is and its strategy going forward.

What information do non-dilutive capital providers collect?

The general performance of a business, particularly over the past 12-24 months, is analysed to estimate what’s likely to come over the next period.

This information can come from various sources of data, but primarily from financial data sources like accounting, banking and commerce systems.

This is often requested by the provider through either view-only access to those systems, as data extracts, or by connecting to the provider’s proprietary software.

At Kashcade we’ve built software that connects directly to these systems in about 10 minutes.

Access to this information is typically required by providers both at the beginning of the application and at regular points, or throughout the entire funding relationship.

Great funding providers only ask for access to this information once and use it to avoid the need for founders to have to put together a deck and pitch to an investment committee.

What metrics do non-dilutive capital providers pay attention to?

NDC providers look at a range of metrics to try and establish a comprehensive picture of the borrowing company’s past and future, as well as what will likely result from additional funding.

These metrics and how much weight they carry will vary across each provider. Below, we’ll outline some key areas Kashcade focuses on, which are likely to be considered by other providers too.

From here, we’ll speak from Kashcade’s perspective…

Once we’ve been introduced to a founder, we quickly connect to their financial data sources and dive into a variety of metrics. We get a feel for the history of these metrics and forecast where things are likely to head next, as well as what happens if trajectories change.

Four key areas we pay extra attention to are: customer, revenue, efficiency and runway.

Customer

It’s no secret that healthy, long-lasting businesses retain and deepen the relationship with their customers over time.

Kashcade looks specifically to customer retention or churn, net dollar growth, and changes in customer lifetime value (LTV) for indicators of how much customers like or love a business, and whether they’re likely to continue buying.

These metrics can be gathered from data in commerce systems like Stripe, Chargebee, etc. and from founders, as they’re typically front of mind.

Revenue

Revenue is also important, particularly when deciding how much funding is available to a business.

How much Kashcade lends is a multiple of a company’s average monthly revenue. Typically, this is up to 4x the recent average.

Average monthly revenue is often taken from the most recent 3-6months. But where seasonality affects a business, other periods are considered too.

Predictability of this revenue is also an important factor; whether revenues are recurring or one-off sales, and how much they vary month to month.

And, of course, revenue growth – both by way of compounded monthly growth rate and period on period. Unlike when pitching for equity capital however, massive growth rates aren’t required. For NDC providers, understanding how much a company’s revenue is growing simply helps indicate whether it’ll be creating value with additional funding. This is typically indicated with moderate annual growth rates (of ~15%+).

Efficiency

Efficiency metrics of a business are helpful in estimating how far funds will go and what they’re likely to return after being spent.

Customer acquisition cost (CAC) compared against LTV tells us whether an appropriate amount of money is spent acquiring customers. Anyone can vigorously spend money to acquire customers, but considering how long those customers stick around and how much they spend before leaving can make the difference between efficient and inefficient spend.

For sales-led businesses investing in sales and marketing (S&M) an equation called the Magic Number tells us a lot. This measures the S&M spend versus the net new ARR generated for a given period and tells us how effective an S&M strategy is at a given point in time. This might be over the past quarter, or six or twelve months, depending on the circumstances of a businesslike their typical sales cycle.

Burn multiple is another key focus area. It’s the amount of free cash flow produced or burnt compared to the net new ARR generated in a period. This metric indicates the general capital efficiency of a business. The lower this is, the more efficient the start-up has been operating. Scores of below 1 or 2 are generally seen as strong for Series A+ start-ups.

Runway

How much runway a company is likely to have is, without a doubt, a key consideration for all non-dilutive capital providers.

Runway (current and forecasted) has a big impact on the perceived risk of a business and likelihood of repaying funds, and therefore is influential on the capital available and terms of those funds.

Kashcade will look at a company’s runway at the time they’re applying, as well as what’s projected into the future, both with and without a cash injection from us. We’ll run a few different scenarios (bear, base and bull) and consider any imminent cash injections or equity raises too.

For companies with shorter runway (say <4-6 months), we’ll sit down with the founders and work out how we can help extend that period or whether we can top up any imminent cash injections they expect.

We’ve talked about why seeking NDC soon after raising equity capital gets founders the best term in another article (see here), and runway is a huge driver.

Getting non-dilutive capital for your start-up

Hopefully this article has helped shed light on what non-dilutive capital providers consider when founders are applying for funds.

At Kashcade, we do our best to make this a simple and low-effort process, letting data do most of the talking so founders can stay focused on their customers.

Generally, it takes founders a brief call to get to know us, and no more than 10 minutes to connect to our software, to get a no-strings offer back in ~48hrs. And, just to be clear, our software does all of these calculations for you so you don't need to worry about hammering away at the keyboard for hours.

We provide straight-forward loans based on a company’s expected revenue, which are repaid in up to 12 equal monthly instalments.

If you’re curious about non-dilutive funding for your start-up, or what else could best prepare you for applying, be sure to have a chat to one of our team members.

Otherwise, reach out now to find out what’s available to your company.

Disclaimer

This article is for informational purposes only, is general in nature and does not consider your specific situation. It is not, and should not be relied upon for, financial, tax, legal or investment advice.