I have to admit that I was a bit skeptical when the founder of that company mentioned to me that he is about to sign an overdraft (debt capital) contract with a bank, only a few weeks after he had initiated the dialog. And indeed, a few days later the agreement was signed and the company received a 6-digit Euro overdraft from Deutsche Handelsbank. That caught my attention and I thought I should learn more about the preconditions for early stage SaaS companies to receive such an overdraft within a few weeks with a contract less than five pages.

Last week Daniel Kreis, the CEO of Deutsche Handelsbank, and I met to discuss his and his bank’s motivation to provide unsecured debt capital to rather early stage companies. I thought this discussion is worth to share with the founders and CEOs of my portfolio companies and, of course, with any other founders of SaaS companies in Europe.

For an intro, Daniel gave me the elevator pitch about Deutsche Handelsbank and how they function. Terms like MRR, CAC, ARR, CLV came up and I was quite surprised to hear such specific terminology from the mouth of a bank’s CEO. A look at Daniel’s background explains why. The Master of Business Economics, with a focus on Innovations- and Technology Management, explains to me, that he has been an entrepreneur and founder himself.
“I think I understand the dilemma of ambitious founders. They would like to grow fast and aggressively which means that they need to raise a lot of money in a startup universe, where money mainly comes for equity.”

Alexander: Daniel, how did you come up with the idea to provide debt capital to rather early stage companies?

Daniel: Well, I do remember my times as a co-founder of a European startup. We had to finance everything with money which we received from equity financing rounds. This was quite “expensive” in early stages, we had to give away quite substantial stakes of our company in order to receive the cash we needed. In 2010, when we started Deutsche Handelsbank, at that time SOFORT Bank, we saw ourselves as enabler for Internet businesses. Rather soon thereafter we kicked off our credit business with a focus on fast growing eCommerce businesses. Mister Spex was one of our first “clients and it was a successful proof of our concept. Already at rather early stages, Mister Spex had implemented highly professional business processes and company structures, which underpinned Mister Spex’s future plans and visions. Shortly thereafter a number of renown eCommerce companies followed, e.g. home 24, Outfittery, Westwing.

A: Who would usually contact you? Or let me ask directly: Who benefits most from your products?

DK: Clearly all shareholders benefit from additional debt capital which comes without any further dilution. For founders we reduce the stake which they have to give away to receive the required funding. For Venture Capital funds we extend the runway, provide for bankability and, after all, reduce risk and increase a company’s valuation.

Investors like to invest their money in sexy fields like product development, marketing and expansion strategies. What remains is a mountain of un-sexy things, which we can cover.
After all it’s about investing equity capital to optimize growth and expansion. Equity capital is too expensive as working capital or liquidity buffer.

A: home24, Outfittery,  Westwing are all eCommerce companies. Recently one of my portfolio companies received an overdraft (line of credit) from you. Was that an exception?

DK: That’s right, and no, that was not an exception! We are very happy to have your SaaS company in our growing client list of maturing European SaaS players. By the way, we are already in contact with two more of your B2B SaaS companies. With a growing number of top eCommerce companies in our client portfolio, we could quickly gain enough experience to be ready to assess other businesses and business models.  We decided to expand our scope from eCommerce to other areas and started to screen markets with similar prediction indicators for growth and related risk. B2B SaaS caught our attention. Our 1st client with a SaaS business model was SofaTutor. Some others followed soon thereafter.

A: So why is B2B SaaS attractive for you? 

DK: Similar to maturing eCommerce companies, most B2B SaaS companies are quite transparent and well predictable. The condition of a SaaS company can be assessed and planned with a handful of key parameters. MRR, Churn, CAC and CLV provide a very good picture about a SaaS company’s business. In many cases they are less capital intensive than eCommerce models, that’s what we like even more about SaaS.

In addition, business to business (B2B) SaaS companies collect long term subscription contracts, sometimes 2 or even 3 years. Needless to mention that such contracted revenue stream for a 12 – 24 months period is a huge plus when we assess the intrinsic risk of a specific SaaS business. This doesn’t mean that we only like Enterprise or B2B SaaS companies. Also SaaS business models geared towards SMBs or consumers can provide solid historical data which help us to look into the future. 

A: Institutional investors have their own bars for key KPIs such as Growth Rate, MRR, Churn. Can you provide us some ballpark figures which you have in mind for Deutsche Handelsbank to get excited?

DK: We are not an equity investor and do not provide venture (risk) capital.  We have a different business model. Since we are not participating in grad upside potential and shareholder value development, our focus is more centered around risk assessment and risk mitigation. Of course we have to understand how SaaS works and we probably look at the same KPIs as any equity investor, but we primarily look at them from a risk perspective versus a value creation perspective. For example. We see that even with modest annual growth rates of 40- 45%, our risk is quite manageable, because of high CLV (Customer Lifetime Value) and good market positioning vis-a-vis competitors, which relates to the chance to become the #1 or #2 in a certain market.

A: What about negative cash flow, negative EBIT?

(I did expect the hear the classic sentence, “well in that case ….” which usually sounds the death knell of any startup’s debt capital conversation with a bank. Daniel leaned a bit forward, almost as if he wanted to indicated that he is now in the middle of his comfort zone. In other words, he had a very encouraging answer …)

DK: This is definitely not a KO criteria, in fact, companies with negative cash flow or EBIT make up the lion share of our clients. In such cases it is however important that a company can present a very solid and professional shareholder structure, willing to help the company turning the business profitable in case a few assumptions have not come true as expected and a slower, less aggressive execution is required. It is not always about “deep pocket” investors who through more money into companies whenever a storm arises. We have seen less capital intensive SaaS companies where everything boiled down to a highly professional execution of a revised, more solid, less aggressive, business model supporting less capital intensity resulting in an improve the equity capital structure. 

A: Lets talk about, lets say, the more challenging things when trying to receive debt capital from you.

DK: We have seen and evaluated SaaS companies with allegedly solid customer “lock ins”. However, after some deeper look, the lock in didn’t really come from product excellence and thought leadership, but from long lasting, excellent personal relationships. In principal there is nothing bad about that, but we see higher risk in such business relationships.

Sometimes companies or their main investors approach shortly before they run out of money. Even with good chances to close the next equity round soon, this is not the time to discuss a line of credit with us. Debt capital is not Venture / Risk Capital. Bridging a company towards the next equity funding should be a task for the existing shareholders and investors.

Very thorough financial management is a must for any SaaS startup. While it is understandable that founders initially focus on product and early customers, they must not forget the importance of a solid, professional financial management. Liquidity is not the measure of all things, in particular in regards to over-indebtedness, but it is the one and only thing that keeps a business alive. Proper liquidity planning should be a priority already in any early stage SaaS startup.

A: Daniel, I know you prefer to discuss every single startup separately and assess businesses on a case by case basis. That’s the right way to do it. Nevertheless, can we put together some ballpark figures, which founders can take as a first litmus test before they contact you?

DK: Yes sure, lets go.

A: How long does it usually take from an introduction to a signed agreement and how much paperwork is necessary?

DK: We can execute very fast. Of course this depends very much on the company and how fast we get the information we need. Companies with professional angels or funds on board have all that information at their fingertips. In regards to paperwork it can’t be much leaner than what we have put in place. Our entire credit agreement fits on three pages. Typically the process from first introduction to closure takes less than a month. 

A: And what information and documentation do you need for your due diligence?

DK: We would need ..

• a company presentation incl. the most relevant KPIs
• the annual report of the previous year
• the last 3 month’s business activity statements (in German: BWA incl. SuSa)
• the next 24 months business plan incl. liquidity forecast
• the last 12 months development of most relevant KPIs
• a current CAP table incl. parameters of previous investmnt rounds

A: Can you highlight the main conditions?

DK: Our credit product suit comprises of three main products. The most suitable product for early stage SaaS companies is our line of credit (overdraft facility). Let me try to summarize the main terms:

A: Thanks Daniel for this very open and encouraging discussion. I am very confident that we will soon have a few more common portfolio companies.

DK: Thanks Alexander for this great initiative. Yes indeed, I see a great synergy between your early stage SaaS activities and our credit services.

Disclaimer: The above write up is a copy of my personal notes from a meeting with Daniel Kreis, CEO of Deutsche Handelsbank. The publishing of this write up at www.saasgarage.com has been approved by Daniel Kreis, CEO of Deutsche Handelsbank. No liability can be derived from the content oft this post, neither from any statements and examples nor from provided figures and timelines. The figures shown shall be considered ballpark figures for a first orientation. For any official information about Deutsche Handelsbank's products and services please visit  https://www.handelsbank.com  or contact respective representatives at Deutsche Handelsbank.  
 

I was impressed about the way Daniel and Deutsche Handelsbank do business. Daniel and the bank have deep startup experience and show a lot of understanding for early stage businesses. That is key for a balanced view on a company and supports an informed, realistic due diligence.

Putting some of the corner stones together it appears to me that a line of credit can be a very helpful additional source of money for SaaS startups in a pre-A or Series A round. MRRs should be in the mentioned ranges. Money is still quite “expensive” for founders and early investors. The proportion of the money from the equity round which needs to be used for the “un-sexy” things (see my notes above)  is still quite high in a 2 – 3m pre-A round, hence an additional line of credit is a welcome additional source of money.

Most debt products are fitted with an aggressive warrant coverage, which means that there is equity to be given away at certain circumstances or at lenders discretion. The line of credit discussed above does not ask for any  equity as a warrant coverage.

If you have any further questions related to this topic, please don’t hesitate to contact me.

Alexander Bruehl, May 18, 2017