The Cost of Capital for founders is going up. Way up.
It’s happening as you read this – there is less equity capital available for growth businesses, there will be even less shortly and then, there will be even less once the already-arranged-funding announcements dry up.
As we head into a (likely) recession with valuation multiples falling and the cost to founders seeking equity capital continuing to rise, it’s quite apparent that this isn’t the same funding landscape it was two weeks/fortnights/months/quarters ago.
The cost of capital to allow founders to grow their business just went way up, as did the expectations attached to their existing growth capital.
Capital comes down to people and choice. Every dollar that enters your technology business is a choice by a founder to take it and a decision by someone else to give it to them. The person handing over that dollar has expectations on how much they’ll get back, and when. By disregarding those expectations, the end result might be… poor to say the least.
Founders need two things to properly succeed with that capital*: the adequate amount to grow effectively and the advice to help them do it efficiently.
* Bonus if that capital is non-dilutive and provided based on the business’ healthy recurring revenue, courtesy of actual paying customers.
Where traditional, conservative business structures (such as restaurants, manufacturers & even farms) have known inputs and outputs, investing into companies with those known upper limits is easy to pattern match and model for a bank. The tangible assets can be leveraged and predictable growth is comforting.
But software changed the game.
Global Distribution. Minimal incremental deployment costs. Different expectations on success.
Venture capital has helped fill the gap in funding a small number of these companies, but the surrounding financial products have not kept up with the needs of fast-growing tech companies. Even venture-backed companies are excluded from the existing institutional banking system.
The missing piece of the traditional finance infrastructure has been the ability to accurately risk score a growing technology company, taking into account the quantitative and qualitative inputs and forming a view of the impact on the outputs.
Tractor has built this IP and is continuing to refine and facilitate the new breed of financial products for tech founders and their companies.
What does this changing landscape look like?
It’s not all doom and gloom for technology company founders, and certainly not for businesses with recurring revenue. But the considerations for funding your tech business just changed and so did the expectations tied to that funding.
There is always a place for different funding options. Certainly, venture capital is important to many businesses and equity capital funding will rebound eventually.
But the opportunity to see a broader range of funding options, to see more companies grow without shareholders completely eradicating their equity in the business in the process, to see more balance in the ecosystem – this is what our team are excited about for the future.
- You can meet the Tractor team, including the co-founders Matt Allen, Aprill Allen and Jodie Imam, on the free AU/NZ ‘The Cost of Capital’ Tour beginning Thursday, May 26, and visiting Melbourne, Sydney, Brisbane, Gold Coast, Adelaide, Perth & Auckland.