David Spreng spent more than 20 years in venture capital before dipping his toe into the world of revenue-based financing and realizing there was a growing appetite for alternatives to venture capital. Indeed, since forming debt-lending company Runway Growth Capital in mid-2015, Spreng has been busy writing checks to a variety of mostly later-stage companies on behalf of his institutional investors. (One of these, Oak Tree Capital Management in LA, is a publicly-traded credit firm.)
He expects he’ll be even busier in 2020. The reason — if you haven’t noticed already — is a general slowing down in what has been a very long boom cycle. “We’re in the late innings of a very long game,” said Spreng today, calling from Davos, where he has been attending meetings this week. “I don’t think the cycle is going to end this second. But where we went from a growth-at-all-costs mentality, boards are now saying, ‘let’s find a balance between top line growth and capital efficiency — let’s figure out a path to profitability.’ ”
Why is that good for Spreng and his colleagues? Because when a cycle ends, venture capitalists get stingier with their portfolio companies, writing fewer checks to support startups that aren’t hitting it out of the park, and often taking a bigger bite under more onerous terms when they do reinvest to counter the added risk they’re taking.
That leaves founders who find themselves in between customer wins — or with less than dazzling growth — looking for so-called non-dilutive capital, money that can get them through lean times without costing them their company.
In some cases, they’re looking for a guy like Spreng.
Spreng anticipates that cash crunches will hardest hit earlier-stage startups that aren’t meeting milestones, which isn’t Runway’s area of focus, but could mean brisk business for many debt lenders that do work with younger companies, from Silicon Valley Bank to Western Technology Investment.
Yet things are picking up at Spreng’s end of the market, too. “We’re mostly only later-stage, so these are companies that are maybe doing $30 million in revenue, they’re 14 years old, they’ve raised $80 million in equity funding so they can almost always refinance. You’re less concerned about things going really bad.”
In fact, at an earlier point in time, some of these companies would have plenty of options. There’s been no shortage of newer entrants into the later-stage funding scene over the last decade. But as the boom times slow a bit, that capital is “less committed,” says Spreng.
“If you look at Fidelity or Wellington or Franklin Templeton, they’re investing out of mutual funds, so if they decide, ‘we’re done with late-stage startups,’ it won’t impact them at all. Late-stage money is much more fickle and transitory than earlier-stage venture firms that are exclusively focused on startups.” These non-traditional players “can turn off that spigot, and that plays into our hands.”
As for the terms Runway specifically is looking for, Spreng says the outfit, which has access to upwards of $700 million to put to work, usually invests around $20 million in companies seeking to shore up their balance sheets, avoid a down round or expand into a new business — sometimes to make themselves more attractive acquisition candidates down the road.
Often, Runway is lending the capital for between 36 to 48 months and is looking for returns in the 15% range, between interest rates, fees on the front and back end and warrants. (These are securities that entitles the holder to buy the underlying stock of the issuing company at a fixed price up to a certain date.)
Like all debt lenders, Runway also incorporates other financial covenants into these deals, meaning both sides must agree to certain terms. If these terms aren’t met, well, there are pretty material downsides.
Either way, Runway isn’t making venture-like returns, which is just fine with Spreng. “In our business, a single or a double is great. We can generate nice returns and we can help founders who might not be ‘sexy’ anymore but still deserve to have money.” It’s a nice break from being a VC, it sounds like. “The return profile is very different. When you’re a venture investor, you’re looking for a home run, or a company just isn’t interesting.”