Founders looking for growth capital are having a harder time than ever amidst record lows in VC funding. However, trading equity for VC cash is not the only path forward. As more crown corporations and corporates launch non-dilutive capital solutions, startup leaders can be more creative with financing growth.
Nulogy is one such company taking advantage of different financing paths, announcing a $20 million raise in March 2023 comprised of funding from Export Development Canada (EDC) and a working capital line of credit from Scotiabank. These kinds of non-equity, non-dilutive funding options come with their own considerations, but are worth it if they unlock a startup’s next phase of growth.
Speaking with BetaKit, Nulogy CFO Sanjay Dhawan shared more details about the company’s round and offered his advice for founders fundraising in turbulent times.
Nulogy had been growing well and brought in Dhawan in 2021 to help scale operations in anticipation of a “much larger capitalization event.” That said, Dhawan and other Nulogy leaders felt that mid- to late-2022 was not the right time to seek that out due to both market and business conditions.
“It was a balance between doing a larger round at a lower value or doing a smaller round and slowing our growth down, but giving ourselves the optionality to then buy ourselves 12-to-24 months to then get set up for a better valuation for the stakeholders,” said Dhawan.
Dhawan added the company chose option two, bringing in extra capital in the near term so they could progress their go-to-market on Nulogy’s two-sided marketplace product and get more market validation. However, Dhawan was concerned about doing an equity raise from VCs.
“The market was obviously in a tailspin and we didn’t want a valuation watermark at that time,” said Dhawan. “We didn’t feel we would have to do a down round, but we wanted to make our funds look as good as possible. And we started searching around for sort of convertible type or subordinated debt type deals.”
These debt deals, with additional funding from EDC, became the core of the company’s $20 million round.
Do your homework
Since every deal is unique, you can’t assume what one startup got, you can get, said Dhawan. The same goes for the market itself—you can’t demand a deal you might have gotten last year.
“Be very aware of the market conditions that you sit in now,” said Dhawan. “What happened yesterday on the street is history, and it’s irrelevant.”
“Work with partners that want to understand and support your business. Sometimes that comes at a price. Be willing to pay that price.”
Once you understand that expectation, you need to prepare for the actual raise. First, Dhawan said it’s a mistake to focus solely on finding the lowest interest rate, lowest fees, or highest valuation for your financing.
“Talk to partners about what you need,” said Dhawan. “Not in terms of specific terms and conditions, but what your business needs are. What are you trying to do?”
Dhawan’s advice is to share openly with as many partners as possible, then continue the conversations with those who hear your needs and talk through them with you. He added that this kind of support comes at a price, usually in the form of higher interest rates or lower valuations. However, Dhawan said this is a cost founders must be willing to pay—the best quality partners can offer strategic advice, go-to-market support, and customer introductions, all of which can produce a higher return than you pay in additional interest or fees.
“Work with partners that want to understand and support your business,” said Dhawan. “Sometimes that comes at a price. Be willing to pay that price. The cheapest deal isn’t always the good deal. Sometimes you give up a little bit of cash flow or equity, but you get more in return.”
Dhawan added a word of caution for founders: be organized throughout the whole process if you want the best chance of success. He explained the “easiest way to mess up or lose a deal” is losing credibility, for instance by not having clean documents or not being able to answer basic questions about your organization.
“Make sure you are prepared,” said Dhawan. “That will give the potential stakeholder a level of confidence that is worth a lot when you’re trying to close the deal two or three months down the road.”
In the current shifting financial landscape, cash flow is a company’s lifeblood. Nulogy uses Sage Intacct and was able to reduce days sales outstanding (DSO) by 50 percent and unlock over $1 million in operating cashflow. “We love to see Canadian tech continue to grow and want to support our customers,” said Eric Sleeth, Senior Industry Marketing Manager at Sage. “Nulogy has been able to deliver improvements in the agility of their workflows and unlocking visibility through real-time reporting to ensure that credibility they deserve to achieve this great milestone.”
While preparation can engender confidence, the thing to avoid entirely is going into “sales mode.” Dhawan said this mindset causes problems because “sales mode” is about selling to someone rather than joining them in a partnership, the latter of which is what nuanced fundraising deals require.
“Take off your sales hat,” said Dhawan. “Be very real. Share your challenges. Share your successes. Share your opportunities and be real. And if you make a connection, that’s the guy you want.”
Embrace the cure
The final point Dhawan made about fundraising in mid- to late-2023 is one about mindset.
Specifically, he said he’s concerned about negative media portrayals of the steep drop in startup valuations, specifically coverage suggesting this is an awful thing. Dhawan posits the opposite: the extreme valuations in 2021 and 2022 were an unhealthy bubble and now “we’re getting cured.” In light of that, his advice for founders looking for capital is to stay open-minded in terms of how you raise and plan for 12-18 months of runway to navigate choppy waters and maintain optionality.
“There’s going to be some pain, but I think we’re going to come out of it healthier with better balance sheets [and] better expectations,” said Dhawan. “There’s incredibly exciting things going on.”
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