We recently explored how to approach entering new revenue segments as well as the marketing channels that can be used to enter them. In each post, we discussed how venture debt financing plays a strategic role. Here, we’ll go more in-depth into specific benefits that can help you achieve your growth goals as you experiment with new revenue segments.
How does using debt to finance growth help to accelerate revenue? With each segment experiment, you’re obviously trying to learn whether that segment will be a revenue generator for your business. This is done on top of the segments that are already performing well for you, meaning that additional resources are required on top of your existing marketing spend.
As a growing SaaS company, those resources may not be readily available. There are solutions for getting that financing, but they may be just as difficult to obtain. Bank loans require assets, and both venture capital and angel investors require equity in your company (and often a seat on your board). Venture debt provides the funding you need to expand and accelerate your market efforts without any outside controlling influence.
With your capital, you can invest in both the acceleration of your existing revenue segments and experimentation in new viable segments to drive up revenue. This can be done faster than other means — equity solutions often take months upon months to close. Meanwhile, funding the channels yourself is the opposite of acceleration for revenue, as it may take you months or even years to acquire the capital needed to make an impact.
In all revenue segment scale-ups and experiments, the business you gain will have a customer acquisition cost (CAC). This is the money you spent trying to get new customers divided by the number of customers gained (over a certain period). Eventually, the revenue you gain from those customers will reimburse you for that cost. This is called payback. However, when significant marketing expenses come into play, customer payback can quickly extend from months to years.
Using debt to finance growth means you’re able to acquire more customers faster and generate more revenue sooner, potentially at an exponential rate that helps offset individual customer payback or reduce it altogether. If you spent $30,000 to acquire 20 new customers, each of whom pays you a monthly fee of, say, $1,500 per month, your payback period will only be one month. Everything else after that is in the black. Had you spent $60,000 over 12 months to acquire 10 new customers at $1,500 per month, not only is your initial investment significantly higher, but your payback period is four times as long.
While venture debt is best used to accelerate sales and marketing efforts, it’s also extremely valuable for retention purposes. As your business grows, the risk for dropping the ball or experiencing other customer service issues increases alongside it. Initially, you may have only had a customer service person or small team in place to support current customers. But as you grow, that will not be sustainable.
In this case, venture debt can help you build out a customer success team. Not only is this group able to provide support and education for your customers, but they can also help identify opportunities for additional revenue. Investing in this team helps you reduce your current churn rate by keeping subscribers aboard your platform and ultimately increasing their lifetime value.
If you’d like to learn other ways that using debt to finance growth can help your SaaS business achieve its goals, we’d love to help. River SaaS Capital has helped many early and growth stage SaaS companies get the financing they need to move their companies forward. Fill out the form below to start a conversation.