Entrepreneurs take out loan rather than hit up VCs

Brisbane-based real estate technology group Rex Labs has sealed a $3.5 million loan from recently established local start-up debt funding specialist Leap Capital, in a deal the company says will let it invest in expanding its app portfolio without diluting the stake of the brothers who founded it.

The company has been established for ten years and has a flagship software as a service product called Rex Software, which is a profitable customer relationship management and finance system used by real estate agencies, but it has also developed a number of other apps it believes will have bigger growth potential in the future.

Rex chief executive Anton Babkov co-founded the company with his brother Alex after developing software to help his real estate agent mother Lana run her business. Lana Babkov is now head of sales at the company.

The company is successful enough to employ 90 staff in Brisbane and the UK, with 1800 agencies using the Rex software, but Mr Babkov said growth in its core product was unspectacular and he had needed funding to establish other products in its growing portfolio.

“The business, as all SaaS businesses do, got to a point where it was sufficiently mature that it was it was paying its bills and doing a good job, but it was still a landlocked product that couldn’t grow a lot internationally as real estate is done differently everywhere,” he said.

“So about four years ago, after attending the South by Southwest event we had our minds blown and realised that if we didn’t change, add scale and do different things, then we could become irrelevant pretty fast.”

Aside from Rex, the company’s apps include Spoke, which lets agencies create property listing campaigns on social media, and a soon-to-be-released property management app called Alfred, which has been in development for three years.

It will target letting agents and property managers, enabling them to manage a range of areas like tenant fees, rent and company financials.

“The interesting thing about property management is that, like advertising, it is done pretty consistently internationally. So we decided that this was a good area for us to attack,” Mr Babkov said.

“It also presents some opportunities for us to cross-sell into our existing customer base, and we will be promoting and selling that when it comes to market in three to four months.”

The concept of venture debt, as opposed to venture capital investment, is still fairly new in Australian tech circles. Leap Capital was founded last year when former VC Guy Reypert raised an initial fund of $50 million, to be targeted at lending to firms as they look to scale up.

Mr Babkov said he and his brother had given away more equity in the business than they would like to early angel investors and were in the process of negotiating ways to buy back some of their holding as they looked to expand. Taking on venture debt was seen as a way to raise growth capital, without further dilution, and it is paid back over a term of about three years.

“I guess anti-dilution is the key thing for us, but also we are almost two companies in one … We are both an established SaaS business that operates across two markets, with a strong cashflow, but relatively boring growth of 15 per cent a year, and also we have two significant growth businesses that are still to prove themselves,” he said.

Mr Babkov said he expected to hit up the VC market for growth funding in about two years, when he hoped the global potential of Spoke and Alfred would be apparent to investors.

Rex represents the largest loan written so far by Leap Capital and Mr Reypert said it was a unique experience for him to back a company founding team without ever meeting in person, due to the COVID-19 pandemic.

He said Rex was introduced to Leap by an advisor and the due diligence period had been surprisingly smooth and effective via virtual meetings and collaboration software.

“I’ve never met Anton and Alex, but I feel like I know them really well because I’ve been on video conference with them literally four or five times a week for the last two months,” Mr Reypert said.

“If you’d asked me several months ago if we would ever provide a loan of this size without having looked someone in the eye and shaken their hand, I would have said, ‘no way,’ but now it has just pretty quickly become something that is just part of operating in the normal course.”

He said he was confident that Rex would continue to do well despite the impacts of COVID-19 on the property market, and that he was looking forward to writing more loans for growth companies across Australia, due to his new found trust in virtual due diligence.

“From our perspective, it might sound a little bit of a cliche, but great businesses will continue to be found through good times and bad,” Mr Reypert said.

“While Rex came to us through an advisor, direct is often best from a company founder. I think what this period has shown us is that we can work more flexibly than we might have initially thought possible.”