How SaaS Capital Helped a Portfolio Company Create $18 Million of Value in 2 Years

And generated a return that was 7.2 times greater than the cost of capital

Background and Situation:

The company was born in a shotgun marriage of two “dot.com” businesses back in 2002. Despite this difficult beginning, the management team and angel investors bootstrapped the business for 10 years and became an industry leader with $9 million in revenue and break-even cash-flows.  Desiring to build upon their success, the management team and investors sought additional capital for two important objectives: 

  • Increase spending on sales and marketing to accelerate growth and thus increase the valuation 
  • Opportunistically acquire weaker competitors to achieve economies of scale and market dominance

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The company had already fully exploited commercial bank financing options which were inexpensive, but did not provide sufficient capital to reach their objectives.  

In terms of equity financing, the company’s investor base which included a number of VC’s investing as individuals, was sensitive to dilution, maintaining control, and preserving flexibility around exit timing. Ironically, raising a round of Venture Capital was not appealing to them.

Traditional venture debt providers were interested in providing a term loan, but that is not what the company needed.

SaaS Capital Solution:

SaaS Capital put in place a $3.5 million line-of-credit for the company. The initial availability of the line was $3.2 million and it was formulaically tied to their recurring revenue. The line was committed for two years and the company drew it down as needed. The proceeds were used to:

  • Attract, hire, and retain new talent to the organization, including a new CEO
  • Improve both their product and go-to-market capabilities

Approximately six months later, the company had the opportunity to buy a small competitor.  SaaS Capital financed 100% of the acquisition through availability on the initial line of credit which had grown with their revenue, as well as increasing the line amount to $4.0 million, and also extending an incremental $1.3 million acquisition loan.

Benefits to the Company:

The size and structure of SaaS Capital's $5.3M total financing package allowed the company to:

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  • Increase organic growth by investing in the team, product, and marketing
  • Make an all cash offer for a competitor which both decreased the purchase price as well as increased shareholder value (little dilution)
  • Managed interest expense by only drawing the capital as needed
  • Positioned the company for exit at substantially improved terms

When SaaS Capital invested, the business had a net equity value of $25 million, and when sold about two years later, the net equity value was $43 million:

  • $18 million of shareholder value had been created in two years through hard work and a successful acquisition.
  • The growth in value was financed entirely by SaaS Capital at a total cost of $2.5 million, including interest, fees, and warrant gains.

Assuming the company had raised equity instead, the cost of financing the business over this period would have been at least $8 million*.

 

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*Assuming the company raised equity at a $25 million pre-money which was the strike price of the SaaS Capital warrant, the cost of financing the business over this period would have been approximately $8 million.  (Capital Raised/Post Money Value)*(Exit Value) or ($5.3/$28.3)*(43)=$8.  Assumes common stock raise with no dividends or participation features.

 

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