Equity may be tough to secure in the current market, but it’s not the only option for startups looking to weather the funding storm. For some, it’s not always the right choice either.
AI eCommerce software platform Particular Audience is fuelling its expansion using ‘growth credit’ – venture debt funding suitable for scaling companies, which acts as a complement to traditional equity funding.
James Taylor founded Particular Audience in 2017, offering AIaaS (AI as a Service) to increase revenue for online retailers.
By late 2021, the Sydney-based startup had grown by 19x, fuelled by eCommerce’s pandemic boom, and was on track to a $100 million gross merchandise value run rate. The company’s success led it to secure a $10 million Series A round that year.
Now, Particular Audience’s AI and machine learning data solutions power the product discovery experiences of some of the world’s best known retail brands, including Target and Singapore Airlines – harnessing the power of AI to provide a different website experience for every customer.
As he looked to fund the next stage of growth for his tech platform, in a softer climate for startup investment, Taylor needed to make a call.
So, Particular Audience took a particular funding route: growth credit.
“Equity has become more expensive in this market. With downward pressure on valuations, we didn’t want to sell shares unnecessarily – zooming out, that equity will be worth a lot more in the future so we wanted to avoid dilution where we could,” CEO Taylor told Startup Daily.
“AI is progressing rapidly, for us, it makes sense to continue to invest back in the business both in terms of R&D and Go-To-Market – credit is the most efficient way to do that if you think about cost of capital.”
Why growth credit needs to be considered by founders
Particular Audience isn’t alone in this choice. Nick Gainsley, partner at Sydney-based venture capital firm OneVentures, says venture debt, which his team calls ‘growth credit’, is an increasingly attractive option for more mature startups looking to extend their runways to ride out the storm.
“Debt is an extremely valuable funding tool for companies looking to grow quickly. It is complimentary to equity while being cheaper and less dilutive,” Gainsley told Startup Daily.
“Debt enables shareholders, including founders, to improve their returns but still get the benefits of bringing on a venture growth investor, without giving up control of their business.
“We’re reframing the funding as ‘growth credit’ as these companies have progressed beyond the initial venture stage of their business and looking for further capital to fund expansion.”
Gainsley says businesses come to them for growth credit because they want to complement their existing capital, to reach milestones in profitability, acquisitions, or to extend runway.
“Debt/Credit can be used in the same way as equity,” Gainsley explained.
“Because it provides funding without dilution and at a reduced borrowing cost, growth credit offers a total funding solution for a sustainable business. It also helps a founder to create a ‘stage and use’ case.”
While growth credit is a useful complement to equity funding, OneVentures consciously chooses not to offer both to the same company.
“We’re the only firm providing both equity and debt financing however, they are separate funding strategies, so we typically do not provide both products to the same company,” Gainsley said. “We also work closely with founders to evaluate which funding options are right for their business, at their growth stage.”
Customer acquisition and the path to profitability
Over the past year, Particular Audience researched various startup financing options before going down the path of growth credit with OneVentures. One of the largest VC firms in Australia, OneVentures is known for its successes working with high-growth, post-Series A technology companies.
OneVentures’ investment in Particular Audience is the first investment from their latest fund, Growth Credit Fund VI. The funding has allowed Particular Audience to apply a laser focus on customer growth so they’re in a good position when the market does improve.
“We’re using growth credit to invest back into our customer acquisition. Whilst doing everything we can to minimise the costs of acquiring new customers, ultimately, the lifetime value of our customers far exceeds any costs to acquire them so it’s a sensible investment for us,” Taylor said.
The decision sat well with Particular Audience’s other investors.
“Each of my major institutional investors has at least one or two other portfolio companies that work with OneVentures so there was a pretty warm reception, I would say,” Taylor said.
The credit has given them time to prove their business model further and prime it for a raise at a higher valuation later.
“Despite market headwinds, Particular Audience has already proven that it can achieve predictable growth,” added Taylor.
“Even though we’re not profitable just yet, with growth credit we can model what our repayments will look like, giving us the ability to manage the facility and service that debt over time.”
A maturing product for maturing companies
Steadying interest rates should see the return of stronger valuations for high-quality high-growth companies. But an improving economic environment will also see the cost of credit fall and OneVentures’ Gainsley expects the funding format to become increasingly popular as the market matures and awareness builds.
“It’s important to keep in mind that the companies we’re lending to have already proven their product and market fit as well as sustainable growth and scaling plans,” Gainsley said.
“They have predictability around their businesses as opposed to early-venture startups.”
Gainsley says Taylor and his team at Particular Audience have shown how their solution will drive material returns for retailers and reduce their costs – something that’s even more important in the current market.
“Ultimately, the best outcomes for both founders and investors are driven by strong, trusting relationships,” he said. “OneVentures deploys a quality over quantity approach – we work with fewer founders, but give them more of our time, because we have a genuine interest in growing their business. When you have that kind of relationship, we are in a better position to advise what funding can get them to the next objective or milestone, whether growth credit or equity.”
Find out more about OneVentures’ growth and equity funds here.
This article is brought to you by Startup Daily in partnership with OneVentures.