General Catalyst offers startups a new alternative
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Venture firm General Catalyst has quietly provided non-dilutive financing to more than 40 companies over the last five and half years, betting their ensuing revenue growth would more than pay back the cash.
Why it matters: GC isn't content with just being a traditional VC firm.
How it works: The firm finances a company's growth by providing it with the cash for up to 80% of its monthly sales and marketing budget.
- The bet is that sales and marketing expenses reliably result in new customers during a given month or quarter. The company then repays GC from the revenue it generates from these new customers (plus a bit more on top).
- But if the company doesn't grow its customer base during that month or quarter, GC doesn't get repaid on the sales and marketing capital it provided during that period.
Between the lines: "When you look at technology companies, once they've found product-market fit, most of the money goes into sales and marketing," says GC managing director Pranav Singhvi, who oversees the firm's Customer Value Financing program.
- Equity financing is an "expensive" way to pay for sales and marketing, he adds, echoing a common refrain from other companies in the non-dilutive financing business.
- As for debt, it can put the company in a bind if its growth stalls or its revenue shrinks.
Zoom in: GC is now deploying "nine figures" in capital per month through this program and managing "in the 10 figures" of total assets, according to Singhvi.
- The money is from a pool of capital separate from its traditional venture funds.
- Typically, companies in the program are fairly mature — or publicly traded, like insurance business Lemonade — spending $2 million to $20 million on sales and marketing monthly, and generating $30 million to $750 million in annual revenue.
- GC has financed more than 40 companies, and most were not previously in its portfolio.
What they're saying: "We think this is the way forward for most technology companies that rely on customer acquisition costs to scale their growth," Lemonade CEO Daniel Schreiber said in a statement to Axios via email.
- "The GC structure enables us to invest significant capital in growth, without raising expensive equity capital, and without placing risk or restrictive covenants on the business associated with debt-like products."
Zoom out: This is yet another way General Catalyst is expanding beyond the traditional venture capital business.
- In January, it announced a deal to acquire Summa Health, an Ohio hospital system.
- And GC is not alone: Other venture firms are expanding their business lines, adding family office divisions and managing public equities portfolios.
The bottom line: Startups can get cash from General Catalyst in many forms.
Non-dilutive financing can be bumpy
Behind the scenes: Non-dilutive financing is not new, and a number of companies made headlines several years ago for making it available to startups.
Yes, but: There have been bumps in the road.
The big picture: A small cottage industry of providers of various non-dilutive financing options sprung up during the recent zero-interest rate policy years.
- Specialized providers like Capchase, Lighter Capital, Arc and Pipe quickly spun up to offer startups and small businesses financing offerings.
- Larger fintech companies have also provided their own as additional products offered to their customers.
Reality check: It's not been without its challenges, namely increasing costs of capital and the risks of having potentially unstable startups as customers.
- Pipe, for example, brought on new leadership and revamped its product focus last year, ditching direct lending.
Zoom in: Clearco — perhaps the highest-profile of them all — went from fast growth and notching an investment from SoftBank's Vision Fund in 2021, to layoffs, executive changes, and a recap last fall.
- After quickly expanding to the U.S., Australia, Ireland, and the Netherlands, the Canadian company refocused last year to North America and providing a single financing product to customers.
- The $60 million it raised last fall includes equity issued to Inovia and Founders Circle for buying a $60 million loan Clearco owed to Silicon Valley Bank.
The bottom line: General Catalyst isn't paving a new road, but it's confident it can dodge the potholes.
